Consolidated financial statements Rosneft Oil Company … TNK-BP Limited and TNK Industrial Holdings...

Consolidated financial statementsRosneft Oil Company

for the year ended December 31, 2017

with independent auditor’s report

Consolidated financial statementsRosneft Oil Company

2

Contents Page

Independent auditor’s report 3

Consolidated balance sheet 8Consolidated statement of profit or loss 9Consolidated statement of other comprehensive income 10Consolidated statement of changes in shareholders’ equity 11Consolidated statement of cash flows 12

Notes to the consolidated financial statements

1. General 142. Basis of preparation 153. Significant accounting policies 154. Significant accounting judgments, estimates and assumptions 295. New and amended standards and interpretations issued but not yet effective 306. Capital and financial risk management 327. Acquisitions of subsidiaries and shares in joint operations 378. Segment information 469. Taxes other than income tax 4810. Export customs duty 4811. Finance income 4812. Finance expenses 4913. Other income and expenses 4914. Personnel expenses 5015. Operating leases 5016. Income tax 5117. Non-controlling interests 5318. Earnings per share 5519. Cash and cash equivalents 5520. Other short-term financial assets 5521. Accounts receivable 5722. Inventories 5723. Prepayments and other current assets 5824. Property, plant and equipment and construction in progress 5925. Intangible assets and goodwill 6126. Other long-term financial assets 6327. Investments in associates and joint ventures 6428. Other non-current non-financial assets 6729. Accounts payable and accrued liabilities 6730. Loans and borrowings and other financial liabilities 6831. Other short-term tax liabilities 7432. Provisions 7433. Prepayment on long-term oil and petroleum products supply agreements 7534. Other non-current liabilities 7535. Pension benefit obligations 7536. Shareholders’ equity 7637. Fair value of financial instruments 7738. Related party transactions 7839. Key subsidiaries 8340. Contingencies 8341. Supplementary oil and gas disclosure (unaudited) 87

Rosneft Oil Company

The accompanying notes to the consolidated financial statements are an integral part of these statements.9

Consolidated Statement of Profit or Loss

(in billions of Russian rubles, except earnings per share data, and share amounts)

For the years ended December 31,

Notes 20172016

(restated)Revenues and equity share in profits of associates

and joint venturesOil, gas, petroleum products and petrochemicals sales 8 5,877 4,887Support services and other revenues 77 75Equity share in profits of associates and joint ventures 27 60 26Total revenues and equity share in profits of

associates and joint ventures 6,014 4,988

Costs and expensesProduction and operating expenses 607 559Cost of purchased oil, gas, petroleum products and refining costs 837 614General and administrative expenses 172 129Pipeline tariffs and transportation costs 596 575Exploration expenses 15 14Depreciation, depletion and amortization 24, 25 586 489Taxes other than income tax 9 1,919 1,296Export customs duty 10 658 657Total costs and expenses 5,390 4,333

Operating income 624 655

Finance income 11 107 91Finance expenses 12 (225) (193)Other income 13 109 49Other expenses 13 (77) (79)Foreign exchange differences 3 (70)Cash flow hedges reclassified to profit or loss 6 (146) (147)Income before income tax 395 306

Income tax expense 16 (98) (114)

Net income 297 192

Net income attributable to:- Rosneft shareholders 222 174- non-controlling interests 17 75 18

Net income attributable to Rosneft per common share (in RUB) –basic and diluted 18 20.95 16.42

Weighted average number of shares outstanding (millions) 10,598 10,598

Rosneft Oil Company


Consolidated Statement of Other Comprehensive Income

(in billions of Russian rubles)


Notes 20172016

(restated)

Net income 297 192

Other comprehensive income – to be reclassified toprofit or loss in subsequent periods

Foreign exchange differences on translation of foreign operations 51 143Foreign exchange cash flow hedges 6 145 155Income from changes in fair value of financial assets

available-for-sale 10 5Income tax related to other comprehensive income –

to be reclassified to profit or loss in subsequent periods 6, 17 (31) (32)Total other comprehensive income – to be reclassified to

profit or loss in subsequent periods, net of tax 175 271

Total comprehensive income, net of tax 472 463

Total comprehensive income, net of tax, attributable to:- Rosneft shareholders 397 445- non-controlling interests 75 18

Rosneft Oil Company


Consolidated Statement of Changes in Shareholders’ Equity

(in billions of Russian rubles, except share amounts)

Numberof shares(millions)

Sharecapital

Additionalpaid-incapital

Otherfunds andreserves

Retainedearnings

Total share-holders’equity

Non-controlling

interestsTotalequity

Balance at January 1,2016 10,598 1 507 (768) 3,146 2,886 43 2,929

Net income – – – – 174 174 18 192Other comprehensive loss – – – 271 – 271 – 271Total comprehensive

(loss)/income – – – 271 174 445 18 463

Change of non-controllinginterest in subsidiaries(Note 17) – – 96 – – 96 180 276

Acquisition ofsubsidiaries (Note 7) – – – – – – 234 234

Disposal of subsidiaries – – – – – – (2) (2)Dividends declared on

common stock (Note 36) – – – – (125) (125) – (125)Other movements – – – – – – 7 7Balance at December 31,

2016 (restated) 10,598 1 603 (497) 3,195 3,302 480 3,782

Net income – – – – 222 222 75 297Other comprehensive

income – – – 175 – 175 – 175Total comprehensive

income – – – 175 222 397 75 472

Change of non-controllinginterest in subsidiaries(Note 17) – – 24 – – 24 44 68

Disposal of subsidiaries – – – – – – (1) (1)Dividends declared on

common stock (Note 36) – – – – (104) (104) (43) (147)Other movements – – – – – – 9 9Balance at December 31,

2017 10,598 1 627 (322) 3,313 3,619 564 4,183

Rosneft Oil Company


Consolidated Statement of Cash Flows



Notes 20172016

(restated)Operating activitiesNet income 297 192

Adjustments to reconcile net income to net cash provided byoperating activitiesDepreciation, depletion and amortization 24, 25 586 489Loss on disposal of non-current assets 13 13 16Dry hole costs 3 5Foreign exchange gain on non-operating activities (24) (16)Cash flow hedges reclassified to profit or loss 6 146 147Offset of prepayments received on oil and petroleum products

supply agreements 33 (255) (122)Offset of other financial liabilities (105) (41)Equity share in profits of associates and joint ventures 27 (60) (26)Non-cash income from disposal of subsidiaries and shares in joint

operations 13 – (29)Gain on out-of-court settlement 13 (100) –Loss from disposal of subsidiaries and non-production assets 13 3 2Changes in bad debt provision 16 –Loss from changes in estimates, impairment and receivables

write-off 25 25Finance expenses 12 225 193Finance income 11 (107) (91)Income tax expense 16 98 114

Changes in operating assets and liabilitiesIncrease in accounts receivable, gross (184) (27)Increase in inventories (41) (29)Increase in restricted cash (10) –(Increase)/decrease in prepayments and other current assets (27) 10Increase in long-term prepayments made on oil and petroleum

products supply agreements 28 (207) (95)Increase/(decrease) in accounts payable and accrued liabilities 24 (58)Increase in other tax liabilities 56 57Decrease in current provisions – (1)Decrease in other current liabilities – (3)Increase in other non-current liabilities – 1

Interest paid on long-term prepayment received on oil andpetroleum products supply agreements (10) (15)

Net increase in operating assets of subsidiary banks (144) (39)Net increase in operating liabilities of subsidiary banks 170 32Proceeds from sale of trading securities 20 3 4Net cash provided by operating activities before income tax

and interest 391 695

Income tax payments (112) (85)Interest received 37 58Dividends received 21 11Net cash provided by operating activities 337 679

Rosneft Oil Company


Consolidated Statement of Cash Flows (continued)



Notes 20172016

(restated)Investing activitiesCapital expenditures (922) (709)Acquisition of licenses and auction fee payments (34) (11)Acquisition of short-term financial assets (103) (178)Proceeds from sale of short-term financial assets 258 689Acquisition of long-term financial assets 26 (58) (403)Proceeds from sale of long-term financial assets 127 19Financing of joint ventures (2) (24)Acquisition of interest in associates and joint ventures 27 (219) (65)Acquisition of interest in subsidiary, net of cash acquired, and joint

arrangements 7 (215) (292)Proceeds from sale of subsidiary, net of cash acquired – (5)Proceeds from sale of property, plant and equipment 5 8Placements under reverse REPO agreements (1) (4)Receipts under reverse REPO agreements 2 2Net cash used in investing activities (1,162) (973)

Financing activitiesProceeds from short-term loans and borrowings 30 1,431 1,155Repayment of short-term loans and borrowings (787) (661)Proceeds from long-term loans and borrowings 30 508 1,125Repayment of long-term loans and borrowings (806) (1,048)Proceeds from other financial liabilities 336 49Repayment of other financial liabilities (22) (14)Interest paid (219) (143)Proceeds from sale of non-controlling share in subsidiary 17 73 300Other financing 9 8Payment of dividends on common stock 36 (104) (125)Dividends paid to minority (38) (1)Net cash provided by financing activities 381 645

Net (decrease)/increase in cash and cash equivalents (444) 351

Cash and cash equivalents at the beginning of the year 19 790 559Effect of foreign exchange on cash and cash equivalents (24) (120)

Cash and cash equivalents at the end of the year 19 322 790

Rosneft Oil Company

Notes to the Consolidated Financial Statements

December 31, 2017

(all amounts in tables are in billions of Russian rubles, except as noted otherwise)

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1. General

Public Joint Stock Company (“PJSC”) Rosneft Oil Company (“Rosneft”) and its subsidiaries (collectively, the“Company”) are principally engaged in exploration, development, production and sale of crude oil and gas andrefining, transportation and sale of petroleum products in the Russian Federation and in certain internationalmarkets.

Rosneft State Enterprise was incorporated as an open joint stock company on December 7, 1995. All assetsand liabilities previously managed by Rosneft State Enterprise were transferred to the Company at their bookvalue effective on that date together with ownership rights to other privatized oil and gas companies belongingto the Government of the Russian Federation (the “State”). The transfer of assets and liabilities was made inaccordance with Russian Government Resolution No. 971 dated September 29, 1995, On the Transformationof Rosneft State Enterprise into Open Joint Stock Company “Oil Company Rosneft”. These transfers involvedthe reorganization of assets under the common control of the State and, accordingly, were accounted for attheir book value. In 2005, the State contributed the shares of Rosneft to the share capital ofJSC ROSNEFTEGAS. As of December 31, 2005, 100% of the shares of Rosneft less one share were ownedby JSC ROSNEFTEGAS and one share was owned by the Russian Federation Federal Agency for theManagement of Federal Property. Subsequently, JSC ROSNEFTEGAS’s ownership interest decreasedthrough the additional issue of shares during Rosneft’s Initial Public Offering (“IPO”) in Russia, an issue ofGlobal Depository Receipts (“GDR”) for shares on the London Stock Exchange and the share swap completedduring the merger of Rosneft and certain subsidiaries in 2006. In March 2013 in the course of the acquisitionof TNK-BP Limited and TNK Industrial Holdings Limited, its subsidiary (collectively with their subsidiaries,“TNK-BP”), JSC ROSNEFTEGAS sold 5.66% of Rosneft shares to BP plc. (“BP”). In December 2016JSC ROSNEFTEGAS signed an agreement to sell 19.5% of Rosneft shares to a consortium of foreigninvestors. As of December 31, 2017 JSC ROSNEFTEGAS’s ownership interest in Rosneft amounted to 50%plus one share.

Under Russian legislation, natural resources, including oil, gas, precious metals and minerals and othercommercial minerals situated in the territory of the Russian Federation, are the property of the State until theyare extracted. Law of the Russian Federation No. 2395-1, On Subsurface Resources, regulates relations arisingin connection with the geological study, use and protection of subsurface resources in the territory of theRussian Federation. Pursuant to the law, subsurface resources may be developed only on the basis of a license.A license is issued by the regional governmental body and contains information on the site to be developedand the period of activity, as well as financial and other conditions. The Company holds licenses issued bycompetent authorities for the geological study, exploration and development of oil and gas blocks, fields, andshelf in areas where its subsidiaries are located.

The Company is subject to export quotas set by the Russian Federation State Pipeline Commission to allowequal access to the limited capacity of the oil pipeline system owned and operated by PJSC AK Transneft.The Company exports certain quantities of crude oil through bypassing the PJSC AK Transneft system thusachieving higher export capacity. The remaining production is processed at the Company’s and third parties’refineries for further sale on domestic and international markets.

Rosneft Oil Company

Notes to the Consolidated Financial Statements (continued)

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2. Basis of preparation

These consolidated financial statements have been prepared in accordance with International FinancialReporting Standards, including all International Financial Reporting Standards (“IFRS”) and Interpretationsissued by the International Accounting Standards Board (“IASB”) and effective in the reporting period, andare fully compliant therewith.

These consolidated financial statements have been prepared on a historical cost basis, except certain financialassets and liabilities measured at fair value (Note 37).

Rosneft and its subsidiaries maintain their books and records in accordance with statutory accounting andtaxation principles and practices applicable in respective jurisdictions. These consolidated financial statementswere derived from the Company’s statutory books and records.

The Company’s consolidated financial statements are presented in billions of Russian rubles (“RUB”), unlessotherwise indicated.

The consolidated financial statements were approved and authorized for issue by the Chief Executive Officerof the Company on March 19, 2018.

Subsequent events have been evaluated through March 19, 2018, the date these consolidated financialstatements were issued.

3. Significant accounting policies

The accompanying consolidated financial statements differ from the financial statements issued for statutorypurposes in that they reflect certain adjustments, not recorded in the Company’s statutory books, which areappropriate for presenting the financial position, results of operations and cash flows in accordance with IFRS.The principal adjustments relate to: (1) recognition of certain expenses; (2) valuation and depreciation ofproperty, plant and equipment; (3) deferred income taxes; (4) valuation allowances for unrecoverable assets;(5) accounting for the time value of money; (6) accounting for investments in oil and gas property andconveyances; (7) consolidation principles; (8) recognition and disclosure of guarantees, contingencies,commitments and certain assets and liabilities; (9) business combinations and goodwill; (10) accounting forderivative instruments; (11) purchase price allocation to the identifiable assets acquired and the liabilitiesassumed.

The consolidated financial statements include the accounts of majority-owned, controlled subsidiaries andspecial-purpose entities where the Company holds a beneficial interest. All significant intercompanytransactions and balances have been eliminated. The equity method is used to account for investments inassociates in which the Company has the ability to exert significant influence over the associates’ operatingand financial policies. Investments in entities where the Company holds the majority of shares, but does notexercise control, are also accounted for using the equity method. Investments in other companies are accountedfor at fair value or cost adjusted for impairment, if any.

Business combinations, goodwill and other intangible assets

Acquisitions by the Company of controlling interests in third parties (or interest in their charter capital) areaccounted for using the acquisition method.

The date of acquisition is the date when effective control over the acquiree passes to the Company.

Rosneft Oil Company


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3. Significant accounting policies (continued)

Business combinations, goodwill and other intangible assets (continued)

The cost of an acquisition is measured as an aggregate of the consideration transferred, measured at acquisitiondate fair value, and the amount of any non-controlling interest in the acquiree. For each business combination,the Company elects whether it measures the non-controlling interest in the acquiree either at fair value or atthe proportionate share of the acquiree’s identifiable net assets. Acquisition costs incurred are expensed andincluded in administrative expenses.

Any contingent consideration to be transferred by the acquirer is recognized at fair value at the acquisitiondate. Subsequent changes to the fair value of the contingent consideration which is deemed to be an asset or aliability should be recognized within profit or loss for the period if they do not represent measurement-periodadjustments. If the contingent consideration is classified as equity, it should not be re-measured.

Goodwill is initially measured at cost being the excess of the aggregate of the consideration transferred andthe amount recognized for non-controlling interests over the fair value of net identifiable assets acquired andliabilities assumed. If the aggregate of the consideration transferred and the amount of non-controlling interestis lower than the fair value of the net assets of the subsidiary acquired and liabilities assumed, the differenceis recognized in profit or loss for the period.

Associates

Investments in associates are accounted for using the equity method unless they are classified as non-currentassets held for sale. Under this method, the carrying value of investments in associates is initially recognizedat the acquisition cost.

The carrying value of investments in associates is increased or decreased by the Company’s reported share inthe profit or loss and other comprehensive income of the investee after the acquisition date. The Company’sshare in the profit or loss and other comprehensive income of an associate is recognized in the Company’sconsolidated statement of profit or loss or in the consolidated statement of other comprehensive income,respectively. Dividends paid by the associate are accounted for as a reduction of the carrying value ofinvestments.

The Company’s net investments in associates include the carrying value of the investments in these associatesas well as other long-term investments that are, in substance, investments in associates, such as loans. If theshare in losses exceeds the carrying value of the investments in associates and the value of other long-terminvestments related to investments in these associates, the Company ceases to recognize its share in losseswhen the carrying value reaches zero. Any additional losses are provided for and liabilities are recognized onlyto the extent that the Company has legal or constructive obligations or has made payments on behalf of theassociate.

If the associate subsequently makes profits, the Company resumes recognizing its share in these profits onlyafter its share of the profits equals the share of losses not recognized.

The carrying value of investments in associates is tested for impairment by reconciling its recoverable amount(the higher of its value in use and fair value less costs to sell) to its carrying value, whenever impairmentindicators are identified.

Rosneft Oil Company


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Joint arrangements

The Company participates in joint arrangements either in the form of joint ventures or joint operations.

A joint venture implies that the parties that have joint control of the arrangement have rights to the net assetsof the arrangement. A joint venture involves establishing a legal entity where the Company and otherparticipants have respective equity interests. Equity interests in joint ventures are accounted for under theequity method.

The Company’s share in net profit or loss and in other comprehensive income of joint ventures is recognizedin the consolidated statement of profit or loss and in the consolidated statement of other comprehensiveincome, respectively, from the date when joint control commences until the date when joint control ceases.A joint operation implies that the parties that have joint control of the arrangement have rights to the assets,and obligations for the liabilities, relating to the arrangement. In relation to its interest in a joint operation theCompany recognizes its assets, including its share of any assets held jointly, its liabilities, including its shareof any liabilities incurred jointly, its revenue from the sale of its share of the output arising from the jointoperation, its share of the revenue from the sale of the output by the joint operation, and expenses, includingits share of any expenses incurred jointly.

Cash and cash equivalents

Cash represents cash on hand, in the Company’s bank accounts, in transit and interest bearing deposits whichcan be effectively withdrawn at any time without prior notice or any penalties reducing the principal amountof the deposit. Cash equivalents are highly liquid, short-term investments that are readily convertible to knownamounts of cash and have original maturities of three months or less from their date of purchase. They arecarried at cost plus accrued interest, which approximates fair value. Restricted cash is presented separately inthe consolidated balance sheet if its amount is significant.

Financial assets

The Company recognizes financial assets in its balance sheet when, and only when, it becomes a party to thecontractual provisions of the financial instrument. When financial assets are recognized initially, they aremeasured at fair value, which is usually the price of the transaction, i.e. the fair value of consideration paid orreceived.

When financial assets are recognized initially, they are classified as one of the following, as appropriate:(1) financial assets at fair value through profit or loss, (2) loans issued and accounts receivable, (3) financialassets held to maturity, or (4) financial assets available for sale.

Financial assets at fair value through profit or loss include financial assets held for trading and financial assetsdesignated as financial assets at fair value through profit or loss at initial recognition. Financial assets held fortrading are those which are acquired principally for the purpose of sale or repurchase in the near future or arepart of a portfolio of identifiable financial instruments that have been commonly managed and for which thereis evidence of a recent pattern of actual short-term profit taking, or which are derivative instruments (unlessthe derivative instrument is defined as an effective hedging instrument). Financial assets at fair value throughprofit or loss are classified in the consolidated balance sheet as current assets and changes in the fair value arerecognized in the consolidated statement of profit or loss as Finance income or Finance expenses.

Rosneft Oil Company


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Financial assets (continued)

All derivative instruments are recorded in the consolidated balance sheet at fair value in either current financialassets, non-current financial assets, current liabilities related to derivative instruments, or non-current liabilitiesrelated to derivative instruments. The recognition and classification of a gain or loss that results fromrecognition of an adjustment of a derivative instrument at fair value depends on the purpose for issuing orholding the derivative instrument. Gains and losses from derivatives that are not accounted for as hedges underInternational Accounting Standard (“IAS”) 39 Financial Instruments: Recognition and Measurement arerecognized immediately in the profit or loss for the period.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date. Subsequent to initial recognition, the fairvalue of financial assets at fair value that are quoted in an active market is defined as bid prices for assets andask prices for issued liabilities as of the measurement date.

If no active market exists for financial assets, the Company measures the fair value using the followingmethods:

· analysis of recent transactions with peer instruments between independent parties;

· current fair value of similar financial instruments;

· discounting future cash flows.

The discount rate reflects the minimum return on investment an investor is willing to accept before starting analternative project, given its risk and the opportunity cost of forgoing other projects.

Loans issued and accounts receivable include non-derivative financial instruments with fixed or determinablepayments that are not quoted in an active market, not classified as financial assets held for trading and havenot been designated as at fair value through profit or loss or available for sale. If the Company cannot recoverall of its initial investment in the financial asset due to reasons other than deterioration of its quality, thefinancial asset is not included in this category. After initial recognition, loans issued and accounts receivableare measured at amortized cost using the effective interest rate method (“EIR"), less impairment losses. TheEIR amortization is included in Finance income in the consolidated statement of profit or loss. The lossesarising from impairment or gains from impairment reversals are recognized in the consolidated statement ofprofit or loss.

The Company does not classify financial assets as held to maturity if, during either the current financial yearor the two preceding financial years, the Company has sold, transferred or exercised a put option on more thanan insignificant (in relation to the total) amount of such investments before maturity, unless: (1) the financialasset was close enough to maturity or the call date so that changes in the market rate of interest did not have asignificant effect on the financial asset’s fair value; (2) after substantially all of the financial asset’s originalprincipal had been collected through scheduled payments or prepayments; or (3) due to an isolated non-recurring event that was beyond the Company’s control and could not have been reasonably anticipated by theCompany.

Dividends and interest income are recognized in the consolidated statement of profit or loss on an accrualbasis. The amount of accrued interest income is calculated using the effective interest rate.

All other financial assets not included in the other categories are designated as financial assets available forsale. Specifically, the shares of other companies not included in the first category are designated as availablefor sale. In addition, the Company may include any financial asset in this category at the initial recognition.

Rosneft Oil Company


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Financial liabilities

The Company recognizes financial liabilities on its balance sheet when, and only when, it becomes a party tothe contractual provisions of the financial instrument. When financial liabilities are recognized initially, theyare measured at fair value, which is usually the price of the transaction, i.e. the fair value of consideration paidor received.

When financial liabilities are recognized initially, they are classified as one of the following:

· financial liabilities at fair value through profit or loss;

· other financial liabilities.

Financial liabilities at fair value through profit or loss are financial liabilities held for trading unless suchliabilities are linked to the delivery of unquoted equity instruments.

At the initial recognition, the Company may include in this category any financial liability, except for equityinstruments that are not quoted in an active market and whose fair value cannot be reliably measured. Afterinitial recognition, however, the liability cannot be reclassified.

Financial liabilities not classified as financial liabilities at fair value through profit or loss are designated asother financial liabilities. Other financial liabilities include, inter alia, trade and other accounts payable, andloans and borrowings payable.

Subsequent to initial recognition, financial liabilities at fair value through profit or loss are measured at fairvalue, with changes in fair value recognized in profit or loss in the consolidated statement of profit or loss.Other financial liabilities are carried at amortized cost.

The Company writes off a financial liability (or part of a financial liability) from its balance sheet when, andonly when, it is extinguished – i.e. when the obligation specified in the contract is discharged, cancelled orexpires. The difference between the carrying value of a financial liability (or a part of a financial liability)extinguished or transferred to another party and the redemption value, including any transferred non-monetaryassets and assumed liabilities, is recognized in profit or loss. Any previously recognized components of othercomprehensive income pertaining to this financial liability are also included in the financial result and arerecognized as gains and losses for the period.

Certain prior period indicators have been reclassified to conform to the current year presentation. In particular,due to significant increase in the operating activities of subsidiary banks of the Company and the need forreliable and consistent reporting in the consolidated financial statements, the presentation of cash flows fromthe operating activities of subsidiary banks was revised. Such activities are now included within operatingactivities of the Consolidated Statement of Cash Flows. Further, the operating assets of the subsidiary banks,including short-term interbank deposits placed, were reclassified to Accounts Receivable, operating liabilities,including interbank loans, customer deposits, promissory notes and REPO obligations reclassified from Loansand borrowings and other financial liabilities to Accounts payable and accrued liabilities.

Earnings per share

Basic earnings per share is calculated by dividing net earnings attributable to common shares by the weightedaverage number of common shares outstanding during the corresponding period. In the absence of anysecurities-to-shares conversion transactions, the amount of basic earnings per share stated in these consolidatedfinancial statements is equal to the amount of diluted earnings per share.

Rosneft Oil Company


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Inventories

Inventories consisting primarily of crude oil, petroleum products, petrochemicals and materials and suppliesare accounted for at the weighted average cost unless net realizable value is less than cost. Materials that areused in production are not written down below cost if the finished products into which they will be incorporatedare expected to be sold above cost.

Repurchase and resale agreements

Securities sold under repurchase agreements (“REPO”) and securities purchased under agreements to resell(“reverse REPO”) generally do not constitute a sale of the underlying securities for accounting purposes, andso are treated as collateralized financing transactions. Interest paid or received on all REPO and reverse REPOtransactions is recorded in Finance expense or Finance income, respectively, at the contractually specified rateusing the effective interest method.

Exploration and production assets

Exploration and production assets include exploration and evaluation assets, mineral rights and oil and gasproperties (development assets and production assets).

Exploration and evaluation costs

The Company recognizes exploration and evaluation costs using the successful efforts method as permitted byIFRS 6 Exploration for and Evaluation of Mineral Resources. Under this method, costs related to explorationand evaluation (license acquisition costs, exploration and appraisal drilling) are temporarily capitalized in costcenters by field (well) until the drilling program results in the discovery of economically feasible oil and gasreserves.

The length of time necessary for this determination depends on the specific technical or economic difficultiesin assessing the recoverability of the reserves. If a determination is made that the well did not encounter oiland gas in economically viable quantities, the well costs are expensed to Exploration expenses in theconsolidated statement of profit or loss.

Exploration and evaluation costs, except for costs associated with seismic, topographical, geological, andgeophysical surveys, are initially capitalized as exploration and evaluation assets. Exploration and evaluationassets are recognized at cost less impairment, if any, as property, plant and equipment until the existence(or absence) of commercial reserves has been established. The initial cost of exploration and evaluation assetsacquired through a business combination is formed as a result of purchase price allocation. The cost allocationto mineral rights to proved properties and mineral rights to unproved properties is performed based on therespective oil and gas reserves information. Exploration and evaluation assets are subject to technical,commercial and management review as well as review for indicators of impairment at least once a year. Thisis to confirm the continued intent to develop or otherwise extract value from the discovery. When indicatorsof impairment are present, an impairment test is performed.

If, subsequently, commercial reserves are discovered, the carrying value, less losses from impairment of therespective exploration and evaluation assets, is classified as oil and gas properties (development assets).However, if no commercial reserves are discovered, such costs are expensed after exploration and evaluationactivities have been completed.

Rosneft Oil Company


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Development and production

Oil and gas properties (development assets) are accounted for on a field-by-field basis and represent(1) capitalized costs to develop discovered commercial reserves and to put fields into production, and(2) exploration and evaluation costs incurred to discover commercial reserves reclassified from explorationand evaluation assets to oil and gas properties (development assets) following the discovery of commercialreserves.

The cost of oil and gas properties (development assets) also includes the expenditures to acquire such assets,directly identifiable overhead expenses, capitalized financing costs and related asset retirement(decommissioning) obligation costs. Oil and gas properties (development assets) are generally recognized asconstruction in progress.

Following the commencement of commercial production, oil and gas properties (development assets) arereclassified as oil and gas properties (production assets).

Other property, plant and equipment

Other property, plant and equipment is stated at historical cost as of the acquisition date, except for property,plant and equipment acquired prior to January 1, 2009, which is stated at deemed cost, net of accumulateddepreciation and impairment. The cost of maintenance, repairs, and the replacement of minor items of propertyis charged to operating expenses. Renewals and betterments of assets are capitalized.

Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciationare eliminated from the accounts. Any resulting gains or losses are included in profit or loss.

Depreciation, depletion and amortization

Oil and gas properties are depleted using the unit-of-production method on a field-by-field basis starting fromthe commencement of commercial production.

In applying the unit-of-production method to mineral licenses, the depletion rate is based on total provedreserves. In applying the unit-of-production method to producing wells and the related oil and gasinfrastructure, the depletion rate is based on proved developed reserves.

Other property, plant and equipment are depreciated using the straight-line method over their estimated usefullives from the time they are ready for use, except for catalysts which are amortized using the unit-of-productionmethod.

Components of other property, plant and equipment and their respective estimated useful lives are as follows:

Property, plant and equipment Useful life, not more than

Buildings and structures 30-45 yearsPlant and machinery 5-25 yearsVehicles and other property, plant and equipment 6-10 yearsService vessels 20 yearsOffshore drilling assets 20 years

Land generally has an indefinite useful life and is therefore not depreciated.

Land leasehold rights are amortized on a straight-line basis over their expected useful life, which averages20 years.

Rosneft Oil Company


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Construction grants

The Company recognizes construction grants from local governments when there is a reasonable assurancethat the Company will comply with the conditions attached and that the grant will be received. The constructiongrants are accounted for as a reduction of the cost of the asset for which the grant is received.

Impairment of non-current assets

The Company assesses at each balance sheet date whether there is any indication that an asset or cash-generating unit may be impaired. If any such indication exists, the Company estimates the recoverable amountof the asset or cash-generating unit.

In assessing whether there is any indication that an asset may be impaired, the Company considers internal andexternal sources of information. It considers at least the following:

External sources of information:

· during the period, an asset’s market value has declined significantly more than would be expected asa result of the passage of time or normal use;

· significant changes with an adverse effect on the Company have taken place during the period, or willtake place in the near future, in the technological, market, economic or legal environment in whichthe Company operates or in the market to which an asset is dedicated;

· market interest rates or other market rates of return on investments have increased during the period,and those increases are likely to affect the discount rate used in calculating an asset’s value in use anddecrease the asset’s recoverable amount materially;

· the carrying amount of the net assets of the Company is more than its market capitalization.

Internal sources of information:

· evidence is available of obsolescence or physical damage of an asset;

· significant changes with an adverse effect on the Company have taken place during the period, or areexpected to take place in the near future, in the extent to which, or manner in which, an asset is used oris expected to be used (e.g., the asset becoming idle, or the useful life of an asset is reassessed as finiterather than indefinite);

· information on dividends from a subsidiary, joint venture or associate;

· evidence is available from internal reporting that indicates that the economic performance of an asset is,or will be, worse than expected. Such evidence includes the existence of:

· cash flows on acquiring the asset, or subsequent cash needs for operating or maintaining it, thatare significantly higher than those originally budgeted;

· actual net cash flows or operating profit or loss flowing from the asset that are significantly worsethan those budgeted;

· a significant decline in budgeted net cash flows or operating profit, or a significant increase inbudgeted losses, flowing from the asset;

· operating losses or net cash outflows for the asset, when current period amounts are aggregatedwith budgeted amounts for the future.

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Impairment of non-current assets (continued)

The following factors indicate that exploration and evaluation assets may be impaired:

· the period for which the Company has the right to explore in the specific area has expired during theperiod or will expire in the near future, and is not expected to be renewed;

· substantive expenditure on further exploration for and evaluation of mineral resources in the specificarea is neither budgeted nor planned;

· exploration for and evaluation of mineral resources in the specific area have not led to the discovery ofcommercially viable quantities of mineral resources and the Company has decided to discontinue suchactivities in the specific area;

· sufficient data exist to indicate that, although a development in the specific area is likely to proceed, thecarrying amount of the exploration and evaluation asset is unlikely to be recovered in full fromsuccessful development or by sale.

The recoverable amount of an asset or a cash-generating unit is the higher of:

· the value in use of an asset (cash-generating unit); and

· the fair value of an asset (cash-generating unit) less costs to sell.

If the asset does not generate cash inflows that are largely independent of those from other assets, itsrecoverable amount is determined for the asset’s cash-generating unit.

The Company initially measures the value in use of a cash-generating unit. When the carrying amount ofa cash-generating unit is greater than its value in use, the Company measures the unit’s fair value forthe purpose of measuring the recoverable amount. When the fair value is less than the carrying value animpairment loss is recognized.

Value in use is determined by discounting the estimated value of the future cash inflows expected to be derivedfrom the asset or cash-generating unit, including cash inflows from its sale. The value of the future cash inflowsfrom a cash-generating unit is determined based on the forecast approved by management of the business unitto which the unit in question pertains.

Impairment of financial assets

At each balance sheet date the Company analyzes whether there is objective evidence of impairment for allcategories of financial assets, except those recorded at fair value through profit or loss. A financial asset ora group of financial assets is deemed to be impaired if there is objective evidence of impairment as a result ofone or more events that has occurred since the initial recognition of the asset (an incurred ‘loss event’) and thatloss event has an impact on the estimated future cash flows of the financial asset or the group of financialassets that can be reliably estimated. Evidence of impairment may include (but is not limited to) indicationsthat debtors or a group of debtors are experiencing financial difficulty, default or delinquency in interest orprincipal payments, the probability that they will enter bankruptcy or other financial reorganization andobservable data indicating that there is a measurable decrease in the estimated future cash flows, such aschanges in arrears or economic conditions that correlate with defaults.

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Capitalized interest

Interest expense on borrowed funds used for capital construction projects and the acquisition of property, plantand equipment is capitalized provided that the interest expense could have been avoided if the Company hadnot made capital investments. Interest is capitalized only during the period when construction activities areactually in progress and until the resulting properties are put into operation.

Capitalized borrowing costs include exchange differences arising from foreign currency borrowingsto the extent that they are regarded as an adjustment to interest costs.

Leasing agreements

Leases, which transfer to the Company substantially all the risks and benefits incidental to ownership ofthe asset, are classified as financial leases and are capitalized at the commencement of the lease at the fairvalue of the leased property or, if lower, at the present value of the minimum lease payments. Lease paymentsare apportioned between the finance expenses and reduction of the lease liability in order to achieve a constantrate of interest on the remaining balance of the liabilities. Finance expenses are charged directly to theconsolidated statement of profit or loss.

Leased property, plant and equipment are accounted for using the same policies applied to the Company’s ownassets. In determining the useful life of a leased item of property, plant and equipment, consideration is givento the probability of the title being transferred to the lessee at the end of the lease term.

If there is no reasonable certainty that the lessee will obtain ownership by the end of the lease term, the assetshall be fully depreciated over the shorter of the lease term and its useful life. Where such certainty exists, theasset is depreciated over its useful life.

Leases where the lessor retains substantially all the risks and benefits of ownership of the asset are classifiedas operating leases. Operating lease payments are recognized as an expense in the consolidated statement ofprofit or loss on a straight-line basis over the lease term.

Asset retirement (decommissioning) obligations

The Company has asset retirement (decommissioning) obligations associated with its core business activities.The nature of the assets and potential obligations are as follows:

The Company’s exploration, development and production activities involve the use of wells, related equipmentand operating sites, oil gathering and treatment facilities, tank farms and in-field pipelines. Generally, licensesand other regulatory acts require that such assets be decommissioned upon the completion of production.According to these requirements, the Company is obliged to decommission wells, dismantle equipment, restorethe sites and perform other related activities. The Company’s estimates of these obligations are based oncurrent regulatory or license requirements, as well as actual dismantling and other related costs. Theseliabilities are measured by the Company using the present value of the estimated future costs ofdecommissioning of these assets. The discount rate is reviewed at each reporting date and reflects currentmarket assessments of the time value of money and the risks specific to the liability.

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Asset retirement (decommissioning) obligations (continued)

In accordance with IFRS Interpretations Committee (“IFRIC”) Interpretation 1 Changes in ExistingDecommissioning, Restoration and Similar Liabilities, the provision is reviewed at each balance sheet date asfollows:

· upon changes in the estimates of future cash flows (e.g., the costs of and timeframe for abandoning onewell) or the discount rate, changes in the amount of the liability are included in the cost of the item ofproperty, plant, and equipment, whereby such cost may not be negative and may not exceed therecoverable value of the item of property, plant, and equipment;

· any changes in the liability due to its nearing maturity (change in the discount) are recognized in Financeexpenses.

The Company’s refining and distribution activities involve refining operations, marine and other distributionterminals, and retail sales. The Company’s refining operations consist of major petrochemical operations andindustrial complexes. Legal or contractual asset retirement (decommissioning) obligations related topetrochemical, oil refining and distribution activities are not recognized due to the limited history of suchactivities in these segments, the lack of clear legal requirements as to the recognition of obligations, as well asthe fact that decommissioning periods for such assets are not determinable.

Because of the reasons described above, the fair value of an asset retirement (decommissioning) obligation inthe refining and distribution segment cannot be reasonably estimated.

Due to continuous changes in the Russian regulatory and legal environment, there could be future changes tothe requirements and contingencies associated with the retirement of long-lived assets.

Income tax

Since 2012 Russian tax legislation has allowed income taxes to be calculated on a consolidated basis. The mainsubsidiaries of the Company were therefore combined into a consolidated group of taxpayers (Note 40). Forsubsidiaries which are not included in the consolidated group of taxpayers, income tax is calculated on anindividual subsidiary basis. Deferred income tax assets and liabilities are recognized in the accompanyingconsolidated financial statements in the amount determined by the Company in accordance with IAS 12Income Taxes.

Deferred tax is provided using the liability method on temporary differences at the reporting date between thetax bases of assets and liabilities and their carrying amounts for financial reporting purposes.

A deferred tax liability is recognized for all taxable temporary differences, except to the extent that the deferredtax liability arises from:

· the initial recognition of goodwill;

· the initial recognition of an asset or liability in a transaction which:

· is not a business combination; and

· affects neither accounting profit, nor taxable profit;

· investments in subsidiaries when the Company is able to control the timing of the reversal ofthe temporary differences and it is probable that the temporary differences will not reverse inthe foreseeable future.

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Income tax (continued)

A prior period tax loss planned to be used to reduce the current or future amount of income tax is recognizedas a deferred tax asset.

A deferred tax asset is recognized only to the extent that it is probable that taxable profit will be availableagainst which the deductible temporary differences can be utilized, unless the deferred tax asset arises fromthe initial recognition of an asset or liability in a transaction that:

· is not a business combination; and

· at the time of the transaction, affects neither accounting profit nor taxable profit (tax loss).

The Company recognizes deferred tax assets for all deductible temporary differences arising from investmentsin subsidiaries and associates, and interests in joint ventures, to the extent that the following two conditionsare met:

· the temporary difference will reverse in the foreseeable future; and

· taxable profit will be available against which the temporary difference can be utilized.

Deferred tax assets and liabilities shall be measured at the tax rates that are expected to apply to the periodwhen the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted orsubstantively enacted by the end of the reporting period.

The measurement of deferred tax assets and liabilities reflects the tax consequences that would follow fromthe manner in which the Company expects, at the end of the reporting period, to recover or settle the carryingamount of its assets and liabilities. Deferred tax assets and liabilities are offset when there is a legallyenforceable right to set off current tax assets against current tax liabilities and when they relate to income taxeslevied by the taxation authority of the same jurisdiction and the Company intends to settle its current tax assetsand liabilities on a net basis.

The carrying amount of a deferred tax asset is reviewed at each balance sheet date.

The Company reduces the carrying amount of a deferred tax asset to the extent that it is no longer probable thatsufficient taxable profit will be available to allow the benefit of part or all of that deferred tax asset to be utilized.

Deferred tax assets and liabilities are classified as Non-current Deferred tax assets and Non-current Deferredtax liabilities, respectively.

Deferred tax assets and liabilities are not discounted.

Recognition of revenues

Revenues are recognized when risks and rewards pass to the customer, which usually occurs when the titlepasses to the customer, provided that the contract price is fixed or determinable and collectability of thereceivable is reasonably assured. Specifically, domestic sales of crude oil and gas, as well as petroleumproducts and materials are usually recognized when title passes. For export sales, title generally passes at theborder of the Russian Federation and the Company covers transportation expenses (except freight), duties andtaxes on those sales (Note 10). Revenue is measured at the fair value of the consideration received or receivabletaking into account the amount of any trade discounts, volume rebates and reimbursable taxes.

Sales of support services are recognized as services are performed provided that the service price can bedetermined and no significant uncertainties regarding the receipt of revenues exist.

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Transportation expenses

Transportation expenses recognized in the consolidated statement of profit or loss represent all expensesincurred by the Company to transport crude oil for refining and to end customers, and to deliver petroleumproducts from refineries to end customers (these may include pipeline tariffs and any additional railroadtransportation costs, handling costs, port fees, sea freight and other costs).

Refinery maintenance costs

The Company recognizes the costs of overhauls and preventive maintenance performed with respect to oilrefining assets as expenses when incurred.

Environmental liabilities

Expenditures that relate to an existing condition caused by past operations, and do not have a future economicbenefit, are expensed. Liabilities for these expenditures are recorded when environmental assessments or clean-ups are probable and the costs can be reasonably estimated.

Accounting for contingencies

Certain conditions may exist as of the date of these consolidated financial statements which may further resultin a loss to the Company, but which will only be resolved when one or more future events occur or fail tooccur. The Company’s management makes an assessment of such contingent liabilities which is based onassumptions and is a matter of opinion. In assessing loss contingencies relating to legal or tax proceedings thatinvolve the Company or unasserted claims that may result in such proceedings, the Company, after consultationwith legal or tax advisors, evaluates the perceived merits of any legal or tax proceedings or unasserted claimsas well as the perceived merits of the amount of relief sought or expected to be sought therein.

If the assessment of a contingency indicates that it is probable that a loss will be incurred and the amount ofthe liability can be estimated, then the estimated liability is accrued in the Company’s consolidated financialstatements. If the assessment indicates that a potentially material loss contingency is not probable, but isreasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, togetherwith an estimate of the range of possible loss if determinable and material, would be disclosed.

Loss contingencies considered remote are generally not disclosed unless they involve financial guarantees, inwhich case the nature of the guarantee would be disclosed. However, in some instances in which disclosure isnot otherwise required, the Company may disclose contingent liabilities or other uncertainties of an unusualnature which, in the judgment of management after consultation with its legal or tax counsel, may be of interestto shareholders or others.

Taxes collected from customers and remitted to governmental authorities

Refundable taxes (excise and value-added tax (“VAT”)) are deducted from revenues. Other taxes and dutiesare not deducted from revenues and are recognized as expenses in Taxes other than income tax in theconsolidated statement of profit or loss.

VAT and excise receivable and payable are recognized as Prepayments and other current assets and Other taxliabilities in the consolidated balance sheet, respectively.

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Functional and presentation currency

The consolidated financial statements are presented in Russian rubles, which is the functional currency ofRosneft Oil Company and all of its subsidiaries operating in the Russian Federation. The functional currencyof the foreign subsidiaries is generally the U.S. dollar.

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing atthe dates of these transactions. Foreign exchange gains and losses resulting from the settlement of suchtransactions and from the translation of monetary assets and liabilities denominated in foreign currenciesat year-end exchange rates are recognized in the profit or loss for the period.

Foreign exchange gains and losses resulting from the translation of monetary assets and liabilities designatedas foreign currency cash flow hedging instruments are recognized within other comprehensive income andreclassified to profit or loss in the period when the hedged item affects profit or loss.

Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using theexchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreigncurrency are translated using the exchange rates at the date when the fair value is determined.

The Company’s subsidiaries

The results and financial position of all of the Company’s subsidiaries, joint ventures and associates that havea functional currency which is different from the presentation currency are translated into the presentationcurrency as follows:

· assets and liabilities for each balance sheet presented are translated at the closing rate at thatreporting date;

· income and expenses for each statement of profit or loss and each statement of other comprehensiveincome are translated at average exchange rates (unless this average is not a reasonable approximationof the cumulative effect of the rates prevailing on the transaction dates, in which case income andexpenses are translated at the rate on the dates of the transactions); and

· all resulting exchange differences are recognized as a separate component of other comprehensiveincome.

Prepayment on oil and petroleum products supply agreements

In the course of business the Company enters into long-term oil supply contracts. The contract termsmay require the buyer to make a prepayment.

The Company considers long-term oil supply contracts to be regular-way sale contracts entered into andcontinued to be held for the purpose of the receipt or delivery of non-financial items in accordance withthe Company’s expected purchase, sale or usage requirements. Regular-way sale contracts are exempted fromthe scope of IAS 32 Financial Instruments: Presentation and IAS 39 Financial Instruments: Recognition andMeasurement.

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Prepayment on oil and petroleum products supply agreements (continued)

Conditions for meeting the definition of a regular-way sale are not met if either of the following applies:

· the ability to settle net in cash or another financial instrument, or by exchanging financial instruments,is not explicit in the terms of the contract, but the Company has a practice of settling similar contractsnet in cash or via another financial instrument or by exchanging financial instruments (whether withthe counterparty, by entering into offsetting contracts or by selling the contract before its exerciseor lapse);

· for similar contracts, the Company has a practice of taking delivery of the underlying goods and sellingthem within a short period after delivery for the purpose of generating a profit from short-termfluctuations in price or from a dealer’s margin.

Prepayments for the delivery of goods or respective deferred revenue are accounted for as non-financialliabilities because the outflow of economic benefits associated with them is the delivery of goods and servicesrather than a contractual obligation to pay cash or another financial asset.

Changes in accounting policies and disclosures

The accounting policies adopted are consistent with those of the previous financial year except for the adoptionof new standards and interpretations effective as of January 1, 2017.

The following amendments were applied for the first time in 2017:

· Disclosure Initiative – amendments to IAS 7 Statement of Cash Flows. The amendments requirecompanies to provide a reconciliation of financing cash flows in the statement of cash flows to theopening and closing balances of liabilities arising from financing activities (except for equity balances)in the statement of financial position. The above mentioned reconciliation is presented in Note 31 “Loansand borrowings and other financial liabilities”.

· Deferred Tax Assets for Unrealised Losses – amendments to IAS 12 Income Taxes. These amendmentsclarify how to account for deferred tax assets related to debt instruments measured at fair value.

Application of these amendments had no significant impact on the Company’s financial position or results ofoperations.

Certain prior period balances have been reclassified to conform to the current year presentation.

4. Significant accounting judgments, estimates and assumptions

The preparation of consolidated financial statements requires management to make a number of accountingestimates and assumptions that affect the reported amounts of assets and liabilities and the disclosureof contingent assets and liabilities. The actual results, however, could differ from those estimates.

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4. Significant accounting judgments, estimates and assumptions (continued)

The most significant accounting estimates and assumptions used by the Company’s management in preparingthe consolidated financial statements include:

· estimation of oil and gas reserves;

· estimation of rights to, recoverability and useful lives of non-current assets;

· impairment of goodwill (Note 25 “Intangible assets and goodwill”);

· allowances for doubtful accounts receivable and obsolete and slow-moving inventories(Note 21 “Accounts receivable” and Note 22 “Inventories”);

· assessment of asset retirement (decommissioning) obligations (Note 3 “Significant accounting policies”,section: “Asset retirement (decommissioning) obligations”, and Note 32 “Provisions”);

· assessment of legal and tax contingencies, recognition and disclosure of contingent liabilities(Note 40 “Contingencies”);

· assessment of deferred income tax assets and liabilities (Note 3 “Significant accounting policies”,section: “Income tax”, and Note 16 “Income tax”);

· assessment of environmental remediation obligations (Note 32 “Provisions” and Note 40 “Contingencies”);

· fair value measurements (Note 37 “Fair value of financial instruments”);

· assessment of the Company’s ability to renew operating leases and to enter into new lease agreements;

· purchase price allocation to the identifiable assets acquired and the liabilities assumed(Note 7 “Acquisition of subsidiaries and shares in joint operations”).

Significant estimates and assumptions affecting the reported amounts are those used in determiningthe economic recoverability of reserves.

Such estimates and assumptions may change over time when new information becomes available, e.g.:

· more detailed information on reserves was obtained (either as a result of more detailed engineeringcalculations or additional exploration drilling activities);

· supplemental activities to enhance oil recovery were conducted;

· changes were made in economic estimates and assumptions (e.g. a change in pricing factors).

5. New and amended standards and interpretations issued but not yet effective

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 establishes a singleframework for revenue recognition and contains requirements for related disclosures. The new standardreplaces IAS 18 Revenue, IAS 11 Construction Contracts, and the related interpretations on Revenuerecognition. The standard is effective for annual periods beginning on or after January 1, 2018. In April 2016,the IASB issued amendments to IFRS 15, which have the same effective date as the new standard: January 1,2018. As a result of the analysis performed by the Company, the conclusion was made that there will be nosignificant impact of the standard on the consolidated financial statements.

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5. New and amended standards and interpretations issued but not yet effective (continued)

In July 2014, the IASB issued the final version of IFRS 9 Financial Instruments. The final version of IFRS 9replaces IAS 39 Financial Instruments: Recognition and Measurement, and all previous versions of IFRS 9.IFRS 9 brings together the requirements for the classification and measurement, impairment and hedgeaccounting of financial instruments. In respect of impairment, IFRS 9 replaces the “incurred loss” model usedin IAS 39 with a new “expected credit loss” model that will require a more timely recognition of expectedcredit losses. The standard is effective for annual periods beginning on or after January 1, 2018. In October2017, the IASB issued amendments to IFRS 9 effective on January 1, 2019.

The Company is currently assessing the impact of the standard on the opening balance of retained earnings asof January 1, 2018 as a result of the shift from the “incurred loss” impairment model to “expected credit loss”model, аs well as the change in classification for certain significant financial assets of the Company – from the“amortized cost” category to the “fair value through profit or loss” category.

In September 2014, the IASB issued amendments to IFRS 10 Consolidated Financial Statements and IAS 28Investments in Associates and Joint Ventures entitled Sale or Contribution of Assets between an Investor andits Associate or Joint Venture. These narrow scope amendments clarify that a full gain or loss is recognizedwhen a transaction involves a business (whether it is housed in a subsidiary or not), and a partial gain or lossis recognized when a transaction involves assets that do not constitute a business. The IASB has postponed thedate by when the entities must change these aspects of accounting for transactions between investors and equityaccounted investees. Application of the amendments, initially planned for annual periods beginning on or afterJanuary 1, 2016, has been deferred. The Company does not expect the amendments to have a material impacton the consolidated financial statements, as their requirements are already incorporated in the accountingpolicy of the Company.

In January 2016, the IASB issued IFRS 16 Leases. IFRS 16 eliminates the classification of leases as eitheroperating leases or finance leases and establishes a single lessee accounting model. The most significant effectof the new requirements for the lessee will be an increase in lease assets and financial liabilities. The newstandard replaces the previous leases standard, IAS 17 Leases, and the related interpretations. The standard iseffective for annual periods beginning on or after January 1, 2019, with earlier application permitted forcompanies that also apply IFRS 15 Revenue from Contracts with Customers. The Company is currentlyassessing the impact of the standard on the consolidated financial statements.

In June 2016, the IASB issued amendments to IFRS 2 Share-based Payment entitled Classification andMeasurement of Share-based Payment Transactions. The amendments provide requirements for theaccounting for the effects of vesting and non-vesting conditions on the measurement of cash-settled share-based payments; share-based payment transactions with a net settlement feature for withholding taxobligations; a modification to the terms and conditions of a share-based payment that changes the classificationof the transaction from cash-settled to equity-settled. The amendments are effective for annual periodsbeginning on or after January 1, 2018, with earlier application permitted. The Company does not expect theamendments to have a material impact on the consolidated financial statements.

In September 2016, the IASB issued amendments to IFRS 4 Insurance Contracts entitled Applying IFRS 9Financial Instruments with IFRS 4 Insurance Contracts. The amendments address concerns arising fromimplementing the new financial instruments Standard, IFRS 9, before implementing the replacement Standardthat the Board is developing for IFRS 4. The amendments introduce two approaches, which should reconcilethe timing of the application of the two new standards. Under the first approach, the amendments becomeeffective on the date of first-time adoption of IFRS 9; under the second, the amendments become effective forannual periods beginning on or after January 1, 2018. The Company does not expect the amendments to havea material impact on the consolidated financial statements.

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5. New and amended standards and interpretations issued but not yet effective (continued)

In December 2016, the IASB issued IFRIC 22 Interpretation entitled Foreign Currency Transactions andAdvance Consideration. The IFRIC addresses how to determine the date of the transaction for the purpose ofdetermining the exchange rate to use on initial recognition of the related asset, expense or income (or part ofit) on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receiptof advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on or afterJanuary 1, 2018, with earlier application permitted. The Company does not expect the amendments to have amaterial impact on the consolidated financial statements as their requirements are already incorporated in theaccounting policy of the Company.

In December 2016, the IASB issued amendments to IAS 40 Investment Property entitled Transfers ofInvestment Property. The amendments clarify the requirements for transfers to, or from, investment property.The amendments are effective for annual periods beginning on or after January 1, 2018, with earlier applicationpermitted. The Company does not expect the amendments to have a material impact on the consolidatedfinancial statements.

In May 2017, the IASB issued IFRS 17 Insurance Contracts. IFRS 17 establishes a single framework for theaccounting for insurance contracts and contains requirements for related disclosures. The new standardreplaces IFRS 4 Insurance Contracts. The standard is effective for annual periods beginning on or afterJanuary 1, 2021. The Company does not expect the standard to have a material impact on the consolidatedfinancial statements.

In June 2017, the IASB issued IFRIC 23 Interpretation entitled Uncertainty over Income Tax Treatments. TheIFRIC clarifies that for the purposes of calculating current and deferred tax, companies should use a taxtreatment of uncertainties, which will probably to be accepted by the tax authorities. IFRIC 23 is effective forannual periods beginning on or after January 1, 2019. The Company does not expect the amendments to havea material impact on the consolidated financial statements.

In October 2017, the IASB issued amendments to IAS 28 Investments in Associates and Joint Ventures. Theseamendments clarify that the companies should apply IFRS 9 Financial Instruments, including impairmentrequirements, for the long-term investments in associates and joint ventures, which are accounted for otherwisethan using the equity method, including long-term loans given to associates and joint ventures. Theamendments are effective for annual periods beginning on or after January 1, 2019, with earlier applicationpermitted. The impact of the amendments was assessed within the assessment of the impact ofIFRS 9 Financial Instruments (see above).

6. Capital and financial risk management

Capital management

The Company’s capital management objectives are to ensure its ability to continue as a going concern and tooptimize the cost of capital in order to enhance value to shareholders. Total capital employed and financialliabilities less liquid financial assets are non-IFRS measure.

The Company’s management performs a regular assessment of the financial liabilities less liquid financialassets to capital employed ratio to ensure it meets the Company’s requirements to fulfil the Company’scommitments and to retain strong financial stability.

http://eifrs.ifrs.org/eifrs/PDFArchive?viewFile=17051&categoryId=71&sidebarCategoryId=71



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6. Capital and financial risk management (continued)

Capital management (continued)

The Company’s employed capital is calculated as the sum of equity attributable to equity holders of Rosneft:share capital, reserves, retained earnings and non-controlling interests; financial liabilities, which include longand short-term loans and borrowings, other financial liabilities, as reported in the consolidated balance sheet,less liquid financial assets, including cash and cash equivalents, other short-term financial assets and certainlong-term deposits. The Company’s financial liabilities less liquid financial assets to capital employed ratiowas as follows:

As of December 31,

20172016

(restated)

Financial liabilities less liquid financial assets to capital employed ratio, % 40.8% 32.2%

Financial risk management

In the normal course of business the Company is exposed to the following financial risks: market risk(including foreign currency risk, interest rate risk and commodity price risk), credit risk and liquidity risk. TheCompany has introduced a risk management system and developed a number of procedures to measure, assessand monitor risks and select the relevant risk management techniques.

The Company has developed, documented and approved the relevant policies pertaining to market, credit andliquidity risks and the use of derivative financial instruments.

Foreign currency risk

The Company undertakes transactions denominated in foreign currencies and is exposed to foreign exchangerisk arising from various currency exposures, primarily with respect to the U.S. dollar and euro. Foreignexchange risk arises from assets, liabilities, commercial transactions and financing denominated in foreigncurrencies.

The carrying values of monetary assets and liabilities denominated in foreign currencies are presented in thetable below:

Assets LiabilitiesAs of December 31, As of December 31,

2017 2016 2017 2016

US$ 903 1,358 (1,885) (2,226)EUR 425 153 (67) (87)

Total 1,328 1,511 (1,952) (2,313)

The Company seeks to identify and manage foreign exchange rate risk in a comprehensive manner, includingan integrated analysis of natural economic hedges, in order to benefit from the correlation between income andexpenses. The Company chooses the currency in which to hold cash, such as the Russian ruble, U.S. dollar orother currency for short-term risk management purposes.

The long-term risk management strategy of the Company may involve the use of derivative or non-derivativefinancial instruments in order to minimize foreign exchange rate risk exposure.

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Cash flow hedging of the Company’s future exports

The Company designated certain U.S. dollar denominated borrowings as a hedge of the expected highlyprobable U.S. dollar denominated export revenue stream in accordance with IAS 39 Financial Instruments:Recognition and Measurement.

A portion of future monthly export revenues expected to be received in U.S. dollars was designated as a hedgeditem. The nominal amounts of the hedged item and the hedging instruments were equal. To the extent that achange in the foreign currency rate impacts the fair value of the hedging instrument, the effects are recognizedin other comprehensive income or loss and then reclassified to profit or loss in the same period in which thehedged item affects the profit or loss.

The Company’s foreign currency risk management strategy is to hedge future export revenue in the amount ofthe net monetary position in U.S. dollars. The Company aligns the hedged nominal amount to the net monetaryposition in U.S. dollars on a periodical basis.

Changes in the nominal hedging amount during 2017 are presented in the table below:

US$ million

The equivalentamount at the

CBR exchange rateas of December 31,

2017,RUB billion

Nominal amount as of December 31, 2016 1,763 102Hedging instruments designated 1,000 58Realized cash flow foreign exchange hedges (164) (10)Hedging instruments de-designated (1,726) (100)

Nominal amount as of December 31, 2017 873 50

The impact of foreign exchange cash flow hedges recognized in other comprehensive income is set out below:

2017 2016Before

income taxIncome

taxNet of

taxBefore

income taxIncome

taxNet of

tax

Total recognized in othercomprehensive (loss)/income asof the beginning of the year (435) 87 (348) (590) 118 (472)

Foreign exchange effectsrecognized during the year (1) – (1) 8 (2) 6

Foreign exchange effectsreclassified to profit or loss 146 (29) 117 147 (29) 118

Total recognized in othercomprehensive (loss)/incomefor the year 145 (29) 116 155 (31) 124

Total recognized in othercomprehensive (loss)/income asof the end of the year (290) 58 (232) (435) 87 (348)

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Cash flow hedging of the Company’s future exports (continued)

The schedule of the expected reclassification of the accumulated foreign exchange loss from othercomprehensive income to profit or loss, as of December 31, 2017, is presented below:

Year 2018 2019 2020 2021 Total

Reclassification (146) (146) 2 – (290)Income tax 29 29 – – 58

Total, net of tax (117) (117) 2 – (232)

The expected reclassification is calculated using the Central Bank of Russia (“CBR”) exchange rate as ofDecember 31, 2017 and may be different using actual exchange rates in the future.

Analysis of sensitivity of financial instruments to foreign exchange risk

The level of currency risk is assessed on a monthly basis using sensitivity analysis and is maintained withinthe limits adopted in line with the Company’s policy. The table below summarizes the impact on theCompany’s income before income tax and equity of the depreciation/(appreciation) of the Russian rubleagainst the U.S. dollar and euro.

U.S. dollar effect Euro effect2017 2016 2017 2016

Currency rate change in % 10.09% 20.16% 11.34% 20.83%Gain/(loss) 72/(72) 147/(147) 19/(19) 11/(11)Equity (91)/91 (234)/234 2/(2) 2/(2)

Interest rate risk

Loans and borrowings raised at variable interest rates expose the Company to interest rate risk arising fromthe possible movement of variable elements of the overall interest rate.

As of December 31, 2017, the Company’s variable rate liabilities totaled RUB 1,543 billion (net of interestpayable). The Company analyzes its interest rate exposure, including by performing scenario analysis tomeasure the impact of an interest rate shift on annual income before income tax.

The table below summarizes the impact of a potential increase or decrease in interest rates on the Company’sprofit before tax, as applied to the variable element of interest rates on loans and borrowings.The increase/decrease is based on management estimates of potential interest rate movements.

Increase/decreasein interest rate

Effect on incomebefore income tax

basis points RUB billion

2017 +6 (1)-6 1

2016 +5 (1)-5 1

The sensitivity analysis is limited to variable rate loans and borrowings and is conducted with all other variablesheld constant. The analysis is prepared with the assumption that the amount of variable rate liability outstandingat the balance sheet date was outstanding for the whole year. The interest rate on variable rate loans andborrowings will effectively change throughout the year in response to fluctuations in market interest rates.

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36


Interest rate risk (continued)

The impact measured through the sensitivity analysis does not take into account other potential changes ineconomic conditions that may accompany the relevant changes in market interest rates.

Credit risk

The Company controls its own exposure to credit risk. All external customers and their financial guarantors,other than related parties, undergo a creditworthiness check (including sellers of goods and services who acton a prepayment basis). The Company performs an ongoing assessment and monitoring of the financialposition and the risk of default. In the event of a default by the parties on their respective obligations under thefinancial guarantee contracts, the Company’s exposure to credit risk will be limited to the correspondingcontract amounts. As of December 31, 2017, management assessed such risk as remote.

In addition, as part of its cash management and credit risk function, the Company regularly evaluates thecreditworthiness of financial and banking institutions where it deposits cash and performs trade financeoperations. The Company primarily has banking relationships with the Russian subsidiaries of largeinternational banking institutions and certain large Russian banks. The Company’s exposure to credit risk islimited to the carrying value of financial assets recognized on the consolidated balance sheet.

Liquidity risk

The Company has mature liquidity risk management processes covering short-term, mid-term and long-termfunding. Liquidity risk is controlled through maintaining sufficient reserves and the adequate amount ofcommitted credit facilities and loan funds. Management regularly monitors projected and actual cash flowinformation, analyzes the repayment schedules of the existing financial assets and liabilities, includingupcoming un-accrued interest payments, and performs annual detailed budgeting procedures.

The contractual maturities of the Company’s financial liabilities are presented below:

Year ended December 31, 2017 On demand < 1 year 1 to 5 years > 5 years Total

Loans and borrowings and otherfinancial liabilities – 2,247 1,407 814 4,468

Finance lease liabilities – 9 24 21 54Accounts payable to suppliers and

contractors – 451 – – 451Salary and other benefits payable – 81 – – 81Current operating liabilities of

subsidiary banks 89 247 – – 336Dividends payable – 5 – – 5Other accounts payable – 46 – – 46Derivative financial liabilities – 74 – – 74

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Liquidity risk (continued)

Year ended December 31, 2016(restated) On demand < 1 year 1 to 5 years > 5 years Total

Loans and borrowings and otherfinancial liabilities – 1,605 1,460 800 3,865

Finance lease liabilities – 4 16 24 44Accounts payable to suppliers and

contractors – 337 – – 337Salary and other benefits payable – 80 – – 80Current operating liabilities of

subsidiary banks 41 94 – – 135Other accounts payable – 22 – – 22Derivative financial liabilities – 98 – – 98Voluntary offer to acquire shares – 50 – – 50

As of December 31, 2017, the Company’s current liabilities exceeded its currents assets. Management believesthat the Group’s current cash on hand, expected cash flows from operations and available standby creditfacilities from financial institutions will be sufficient to meet the Company’s working capital requirements andrepay its short-term debts and obligations when they become due. In 2017, the Company was attracting othershort-term borrowings under repurchasing agreement operations, using the favorable market conditions. As aresult, the amount of short-term liabilities increased while an adequate level of liquidity risk was maintained.

7. Acquisitions of subsidiaries and shares in joint operations

Acquisitions of 2017

Acquisition of a 30% interest in the concession agreement for the development of the Zohr field

In October 2017 the Company finalized the acquisition of a 30% stake in the concession agreement for thedevelopment of the Zohr field from Eni S.p.A. Participation in the exploration of this deep-water gas field inoffshore Egypt together with Eni (60%) and BP plc (10%), the Company’s strategic partners, will allow theCompany to substantially increase its gas production abroad within a short period and strengthen its positionsin this promising and strategically significant region. The acquisition price amounted to US$ 1.1 billion, whilethe compensation of the 30% share of past project costs to Eni S.p.A., which is subject to reimbursementaccording to the terms of the concession agreement, amounted to US$ 1.1 billion.

The acquired interest in the concession agreement was classified as a joint operation, and was accounted forthrough the recognition of assets, liabilities, income and expenses in respect of the Company’s interests inaccordance with IFRS 11, Joint Arrangements.

As of December 31, 2017 and the date of authorization of these financial statements for issue the Companyhad not yet completed the fair value estimation of assets acquired and liabilities assumed of its 30% share inthe concession agreement. Allocation of the purchase price to the fair value of the assets acquired and liabilitiesassumed will be finalized within 12 months of the acquisition date.

Acquisition of JSCB Peresvet

In June 2017, the Company acquired a 99.9% share in JSCB Peresvet, a financial institution engaged inbanking services. Through August 2017, JSCB Peresvet underwent financial restructuring managed by theDeposit Insurance Agency (“DIA”), a state corporation. In August 2017, control over JSCB Peresvet wastransferred to the Company.

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7. Acquisitions of subsidiaries and shares in joint operations (continued)

Acquisitions of 2017 (continued)

As of December 31, 2017, the Company had not yet completed the fair value estimation of JSCB Peresvet’sassets acquired and liabilities assumed. Allocation of the purchase price to the fair value of the assets acquiredand liabilities assumed will be finalized within 12 months of the acquisition date.

The following table summarizes the Company’s preliminary allocation of the purchase price to the fair valueof assets acquired and liabilities assumed:

Acquisition of JSCB Peresvet

ASSETSCash and cash equivalents 1Obligatory reserves with the Bank of Russia 1Loans to customers 27Investment securities available for sale 21Investment securities held to maturity 13Expected future benefits from DIA’s financial aid in the form of a reduced rate loan 17Investment property 3Current profit tax assets 2Total assets 85

LIABILITIESAmounts due to credit institutions 18Amounts due to customers 15Debt securities issued 7Other borrowings 32Other liabilities 15Other provisions 2Total liabilities 89

Total identifiable net assets at fair value (4)JSCB Peresvet’s liabilities to the Company existing prior to the acquisition 16Identifiable net assets excluding intercompany liabilities and claims existing prior to the

acquisition 12

Fair value of cash consideration transferred –Intercompany liabilities and claims existing prior to the acquisition 16

Consideration transferred to be included for the purpose of goodwill 16Excluding identifiable net assets of JSCB Peresvet (12)

Goodwill 4

As of December 31, 2017, the Company recognized an impairment of goodwill arising on the JSCB Peresvetacquisition due to the existence of significant impairment indicators. A goodwill impairment loss ofRUB 4 billion is recognized in Other expenses of the Company’s consolidated statement of profit or loss forthe year ended December 31, 2017 (Note 13).

The estimated equity component of convertible bonds representing a non-controlling interest is zero.

The fair value of the cash consideration transferred at the acquisition date was RUB 10 million.

Cash flows arising on the JSCB Peresvet acquisition:

Cash acquired as a result of the JSCB Peresvet acquisition 1Cash paid –

Net cash inflow 1

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The book value of the loans to customers approximates their fair value as of the date of the acquisition. Thereare no loans to customers that are not expected to be collected.

Had the JSCB Peresvet acquisition taken place at the beginning of the reporting period (January 1, 2017),revenues and net income of the combined entity would have been RUB 6,016 billion and RUB 312 billion,respectively, for the year ended December 31, 2017.

Acquisition of LLC Independent Petroleum Company – Projects and LLC Drilling Service Technology

In April, 2017 the Company completed the acquisition of 100% of shares in LLC Independent PetroleumCompany – Projects, an entity engaged in development of the Kondinsky, Zapadno-Erginsky, Chaprovsky andNovo-Endyrsky license areas in the Khanty-Mansiysk Autonomous District and of 100% of shares in LLCDrilling Service Technology, a company involved in the provision of drilling services in the Khanty-Mansiyskregion. The consideration amounted to RUB 49 billion net of cash acquired.

The following table summarizes the Company’s allocation of the purchase price to the fair value of assetsacquired and liabilities assumed:

ASSETSCurrent assetsCash and cash equivalents 5Other current assets 5Total current assets 10

Non-current assetsProperty, plant and equipment 101Deferred tax assets 2Total non-current assets 103Total assets 113

LIABILITIESCurrent liabilitiesOther current liabilities 9Total current liabilities 9

Non-current liabilitiesDeferred tax liabilities 15Loans and borrowings 44Total non-current liabilities 59Total liabilities 68

Total identifiable net assets at fair value 45

Goodwill 9

Total consideration transferred 54

Acquisition of TNK Trading International S.A.

In December 2017 the Company gained control over TNK Trading International S.A. (“TTI”) throughconcluding a number of agreements. Until December 2017 the Company considered its interest in TTI to be apart of investments in joint operations and accounted for its interest using the equity method.

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As of December 31, 2017 and the date of authorization of these financial statements for issue the Companyhad not yet completed the fair value estimation of TTI’s assets acquired and liabilities assumed. Allocation ofthe purchase price to the fair value of the assets acquired and liabilities assumed will be finalized within12 months of the acquisition date.

The following table summarizes the Company’s preliminary allocation of the purchase price to the fair valueof assets acquired and liabilities assumed:

ASSETSCash and cash equivalents 11Prepayments on oil supply agreements 130Intangible asset 9Accounts receivable 13Loans issued 9Total assets 172

LiabilitiesLoans and borrowings 130Accounts payable 12Taxes payable 2Total liabilities 144


Intercompany liabilities and claims existing prior to the acquisition (TTI net liabilities to theCompany existing prior to the acquisition) 120

Identifiable net assets excluding intercompany liabilities and claims existing prior tothe acquisition 148

Fair value of cash consideration transferred –Carrying value of the Company’s investment in joint operations 9Intercompany liabilities and claims existing prior to the acquisition 120Consideration transferred to be included for the purpose of goodwill 129

Finance liability to the bank 19

Excluding identifiable net assets of TTI (148)

Goodwill –

No cash consideration was transferred at the acquisition date.

The identifiable intangible asset amounting to RUB 9 billion represents an estimate of the future benefitsarising from the oil trading agreements between TTI and its major oil supplier. The valuation of this intangibleasset is subject to updating under the final allocation of the purchase price to the fair value of assets acquiredand liabilities assumed.

Cash flows arising from the TTI acquisition:

Cash acquired as a result of the TTI acquisition 11Cash paid –

Net cash inflow 11

The book value of the accounts receivable approximates their fair value as of the date of acquisition. There areno accounts receivable that are not expected to be collected.

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Had TTI’s acquisition taken place at the beginning of the reporting period (January 1, 2017), revenues and netincome of the combined entity would have been RUB 6,043 billion and RUB 305 billion, respectively, for thetwelve month period ended December 31, 2017.

Acquisitions of 2016

Acquisition of shares in refineries in Germany

On December 31, 2016 the Company acquired shares in refineries in Germany as part of the restructuring ofRuhr Oel GmbH, a joint operation with BP Group, engaged in the processing and sale of crude oil in WesternEurope (Note 13). As a result of the restructuring, the Company has become a direct holder and increased itsshareholdings in Bayernoil Raffineriegesellschaft mbH from 12.5% to 25%; in Mineraloelraffinerie OberrheinGmbH from 12% to 24%; and in PCK Raffinerie GmbH (PCK) from 35.42% to 54.17%. In exchange, BP hasconsolidated 100% of the equity of the Gelsenkirchen refinery and solvents production facility DHC SolventChemie GmbH. The total consideration amounted to US$ 1,522 million (RUB 92 billion at the CBR officialexchange rate at the acquisition date).

The acquired interest was classified as a joint operation, and was accounted for through the recognition ofassets, liabilities, income and expenses in respect of the Company’s interests in accordance with IFRS 11, JointArrangements.


ASSETSCurrent assetsAccounts receivable 15Inventories 2Total current assets 17

Non-current assetsProperty, plant and equipment 132Investments in associates and joint ventures 1Total non-current assets 133Total assets 150

LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities 8Loans and borrowings and other financial liabilities 2Other tax liabilities 2Total current liabilities 12

Non-current liabilitiesDeferred tax liabilities 34Other non-current liabilities 12Total non-current liabilities 46Total liabilities 58Total identifiable net assets at fair value 92


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Had the refineries acquisition taken place at the beginning of the reporting period (January 1, 2016), revenuesand net income of the combined entity would have been RUB 5,299 billion and RUB 219 billion, respectively,for the year ended December 31, 2016.

Acquisition of JSC Targin

On December 30, 2016 the Company acquired a 100% interest in JSC Targin, a provider of oilfield services.


ASSETSCurrent assetsAccounts receivable 6Inventories 2Cash and cash equivalents 2Total current assets 10

Non-current assetsProperty, plant and equipment 11Total non-current assets 11Total assets 21

LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities 4Loans and borrowings 4Other current liabilities 1Total current liabilities 9

Non-current liabilitiesLoans and borrowings 4Total non-current liabilities 4Total liabilities 13


Gain on bargain purchase (4)



Had Targin’s acquisition taken place at the beginning of the reporting period (January 1, 2016), revenues andnet income of the combined entity would have been RUB 4,982 billion and RUB 196 billion, respectively, forthe twelve month period ended December 31, 2016.

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Acquisition of PJSC Bashneft Oil Company

On October 12, 2016, the Company completed the acquisition of the state’s stake in PJSC Bashneft OilCompany totaling 50.0755% of its charter capital. The consideration transferred totaled RUB 329.69 billion.As a result of the transaction, the Company has obtained control over PJSC Bashneft Oil Company and itssubsidiaries (“Bashneft”).


ASSETSCurrent assetsCash and cash equivalents 41Accounts receivable 14Inventories 39Prepayments and other current assets 24Other financial assets 5Total current assets 123

Non-current assetsProperty, plant and equipment 861Intangible assets 3Other non-current assets 5Total non-current assets 869Total assets 992

LIABILITIESCurrent liabilitiesAccounts payable and accrued liabilities 56Loans and borrowings 19Profit tax payable 2Other tax liabilities 23Prepayment on long-term oil and petroleum products supply agreements 58Provisions 1Total current liabilities 159

Non-current liabilitiesLoans and borrowings 93Provisions 31Deferred tax liabilities 119Other liabilities 2Total non-current liabilities 245Total liabilities 404


Non-controlling interests measured at fair value (234)Liability for the mandatory offer (50)Goodwill 26


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Bashneft acquisition cash flow:

Net cash acquired 41Cash paid (330)

Net cash outflow (289)


In November 2016, in accordance with Russian legal requirements, Rosneft submitted a mandatory offer toBashneft for the acquisition of 55,466,137 Bashneft ordinary shares. The Company included a liability ofRUB 50 billion to record its liabilities under the mandatory offer in the purchase price allocation for Bashneft.Following the results of the mandatory offer, finalized in February 2017, the Company’s interest in the sharecapital of Bashneft amounted to 60.33%.

Had the Bashneft acquisition taken place at the beginning of the reporting period (January 1, 2016), revenuesand net income of the combined entity would have been RUB 5,420 billion and RUB 225 billion, respectively,for the twelve month period ended December 31, 2016.

Other acquisitions

On March 31, 2016 the Company acquired 100% of shares in a real estate leasing entity. The cost of theacquisition amounted to RUB 3 billion.

In 2016 the Company completed several acquisitions, including JSC Targin, PJSC Bashneft, shares inrefineries in Germany as part of the Ruhr Oel GmbH restructuring. At the date of the issuance of theconsolidated financial statements for the year ended December 31, 2016 the Company made a preliminaryallocation of the purchase price of these acquisitions. The allocation of the purchase price of the acquisitionswas finalized during 2017.

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The following table summarizes the effect from the finalized estimations on the consolidated balance sheet asof December 31, 2016:

Beforefinalized

estimation

Effect from finalized estimation Afterfinalized

estimationGermanrefineries Bashneft

Otheracquisitions

ASSETSCurrent assets 2,300 – – – 2,300

Non-current assetsProperty, plant and equipment 7,090 24 41 (4) 7,151Intangible assets 59 – – – 59Other long-term financial assets 808 – – – 808Investments in associates and joint

ventures 411 – – – 411Bank loans granted 26 – – – 26Deferred tax assets 22 – – – 22Goodwill 230 – 26 – 256Other non-current non-financial assets 84 – – – 84Total non-current assets 8,730 24 67 (4) 8,817

Total assets 11,030 24 67 (4) 11,117

LIABILITIES AND EQUITYCurrent liabilities 2,773 – – – 2,773

Non-current liabilitiesLoans and borrowings and other

financial liabilities 1,914 – – 1,914Deferred tax liabilities 785 21 8 (1) 813Provisions 203 – – 203Prepayment on long-term oil and

petroleum products supplyagreements 1,586 – – 1,586

Other non-current liabilities 43 3 – – 46Total non-current liabilities 4,531 24 8 (1) 4,562

EquityShare capital 1 – – – 1Additional paid-in capital 603 – – – 603Other funds and reserves (497) – – – (497)Retained earnings 3,202 – (4) (3) 3,195Rosneft shareholders’ equity 3,309 – (4) (3) 3,302

Non-controlling interests 417 – 63 – 480Total equity 3,726 – 59 (3) 3,782

Total liabilities and equity 11,030 24 67 (4) 11,117

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8. Segment information

The Company determines its operating segments based on the nature of their operations. The performance ofthese operating segments is assessed by management on a regular basis. The Exploration and productionsegment is engaged in field exploration and the production of crude oil and natural gas. The Refining anddistribution segment is engaged in processing crude oil and other hydrocarbons into petroleum products, aswell as in the purchase, sale and transportation of crude oil and petroleum products. Corporate and otherunallocated activities are not part of the operating segment and include corporate activity, activities involvedin field development, the maintenance of infrastructure and the functioning of the first two segments, as wellas banking and finance services, and other activities. Substantially all of the Company’s operations and assetsare located in the Russian Federation.

Segment performance is evaluated based on both revenues and operating income, which are measured on thesame basis as in the consolidated financial statements, but with intersegment transactions revalued at marketprices.

Operating segments in 2017:

Explorationand

productionRefining anddistribution

Corporateand other

unallocatedactivities Adjustments Consolidated

Total revenues and equity sharein profits of associates andjoint ventures 3,180 6,099 123 (3,388) 6,014

Including: equity share in profits ofassociates and joint ventures 42 16 2 – 60

Costs and expensesCosts and expenses other than

depreciation, depletion andamortization 2,076 5,919 197 (3,388) 4,804

Depreciation, depletion andamortization 462 116 8 – 586

Total costs and expenses 2,538 6,035 205 (3,388) 5,390

Operating income 642 64 (82) – 624

Finance income – – 107 – 107Finance expenses – – (225) – (225)Total finance expenses – – (118) – (118)

Other income – – 109 – 109Other expenses – – (77) – (77)Foreign exchange differences – – 3 – 3Cash flow hedges reclassified to profit

or loss – – (146) – (146)Income before income tax 642 64 (311) – 395

Income tax expense (120) (10) 32 – (98)

Net income 522 54 (279) – 297

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8. Segment information (continued)

Operating segments in 2016 (restated):

Explorationand

productionRefining anddistribution

Corporate andother

unallocatedactivities Adjustments Consolidated

Total revenues and equity share inprofits of associates and jointventures 2,542 5,012 90 (2,656) 4,988

Including: equity share in profits ofassociates and joint ventures 17 8 1 – 26

Costs and expensesCosts and expenses other than

depreciation, depletion andamortization 1,504 4,862 134 (2,656) 3,844

Depreciation, depletion andamortization 395 88 6 489

Total costs and expenses 1,899 4,950 140 (2,656) 4,333

Operating income 643 62 (50) – 655

Finance income – – 91 – 91Finance expenses – – (193) – (193)Total finance expenses – – (102) – (102)

Other income – – 49 – 49Other expenses – – (79) – (79)Foreign exchange differences – – (70) – (70)Cash flow hedges reclassified to profit

or loss – – (147) – (147)Income before income tax 643 62 (399) – 306

Income tax expense (130) (12) 28 – (114)

Net income 513 50 (371) – 192

Oil and gas and petroleum products and petrochemical sales comprise the following (based on the countryindicated in the bill of lading):

2017 2016

International sales of crude oil, petroleum products and petrochemicals 3,986 3,403International sales of crude oil and petroleum products – CIS,

other than Russia 262 183Domestic sales of crude oil, petroleum products and petrochemicals 1,414 1,087Sales of gas 215 214

Total oil, gas, petroleum products and petrochemicals sales 5,877 4,887

The Company is not dependent on any of its major customers or any one particular customer, as there is aliquid market for crude oil and petroleum products. As of December 31, 2017, the amount of currentreceivables from the Company’s largest customer totaled RUB 59 billion, or around 9% of the Company’strade receivables.

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9. Taxes other than income tax

Taxes other than income tax for the years ended December 31 comprise the following:

2017 2016

Mineral extraction tax 1,488 1,007Excise tax 326 197Property tax 38 36Social charges 61 50Other 6 6

Total taxes 1,919 1,296

10. Export customs duty

Export customs duty for the years ended December 31 comprises the following:

2017 2016

Export customs duty on oil sales 480 497Export customs duty on petroleum products and petrochemicals sales 178 160

Total export customs duty 658 657

11. Finance income

Finance income for the years ended December 31 comprises the following:

2017 2016

Interest income onDeposits and certificates of deposit 20 24Loans issued 29 29Notes receivable 5 4Bonds 9 4Long-term advances issued (Note 28) 29 8Current/settlement accounts 1 10Other interest income 1 –Total interest income 94 79

Net gain from operations with derivative financial instruments 10 10Gain from disposal of financial assets 3 –Other finance income – 2

Total finance income 107 91

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12. Finance expenses

Finance expenses for the years ended December 31 comprise the following:

2017 2016Interest expenses onLoans and borrowings (113) (80)Prepayment on long-term oil and petroleum products supply

agreements (Note 33) (81) (90)Other interest expenses (5) (7)Total interest expenses (199) (177)

Increase in provision due to the unwinding of a discount (17) (15)Loss from disposal of financial assets (8) –Other finance expenses (1) (1)

Total finance expenses (225) (193)

The weighted average rates used to determine the amount of borrowing costs eligible for capitalization were8.31% and 4.82% p.a. in 2017 and 2016, respectively.

13. Other income and expenses

Other income for the years ended December 31 comprises the following:

20172016

(restated)

Liability write-off – 5Non-cash income from disposal of subsidiaries and shares in joint operations – 33Compensation payment for licenses from joint venture parties 1 2Gain on out-of-court settlement (Note 40) 100 –Other 8 9

Total other income 109 49

In December 2017, the Company, PJSFC Sistema and JSC Sistema-Invest signed an amicable agreement.According to the terms of this agreement, PJSFC Sistema and JSC Sistema-Invest guarantee to compensatethe Company previously caused losses amounting to RUB 100 billion (Note 40). As of December 31, 2017,the Company received cash in the amount of RUB 20 billion.

The effect from the disposal of subsidiaries and shares in joint operations mainly includes the effect from therestructuring of Ruhr Oel GmbH. It is calculated as the difference between the fair value of the directshareholding acquired in the refineries in Germany – Bayernoil Raffineriegesellschaft mbH,Mineraloelraffinerie Oberrhein GmbH and PCK (Note 7) – and the carrying value of the disposed assets andliabilities of Ruhr Oel GmbH as of December 31, 2016. The effect from the restructuring of Ruhr Oel GmbHincludes the cumulative foreign exchange differences recognized in other comprehensive income, accumulatedin shareholders’ equity and reclassified to profit upon the disposal of Ruhr Oel GmbH.

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13. Other income and expenses (continued)

Other expenses for the years ended December 31 comprise the following:

20172016

(restated)

Sale and disposal of property, plant and equipment and intangible assets (13) (16)Disposal of companies and non-production assets (3) (2)Impairment of assets (26) (23)Social payments, charity and financial aid (20) (16)Other (15) (22)

Total other expenses (77) (79)

14. Personnel expenses

Personnel expenses for the years ended December 31 comprise the following:

2017 2016

Salary 249 211Statutory insurance contributions 62 51Expenses on non-statutory defined contribution plan 7 5Other employee benefits 13 11

Total personnel expenses 331 278

Personnel expenses are included in Production and operating expenses, General and administrative expensesand Other expenses in the consolidated statement of profit or loss.

15. Operating leases

Operating lease agreements have various terms and conditions and primarily consist of indefinite tenancyagreements for the lease of land plots under oilfield pipelines and petrol stations, agreements for the lease ofrail cars and rail tank cars for periods over 12 months, and agreements for the lease of land plots for industrialsites of the Company’s oil refining plants. The agreements provide for an annual revision of the rental ratesand contractual terms and conditions.

Total operating lease expenses for the years ended December 31, 2017 and 2016 amounted to RUB 28 billionand RUB 28 billion, respectively. The expenses were recognized within Production and operating expenses,General and administrative expenses and Other expenses in the consolidated statement of profit or loss.

Future minimum lease payments under non-cancellable operating leases as of December 31 are as follows:

2017 2016

Less than 1 year 29 26From 1 to 5 years 82 83Over 5 years 198 188

Total future minimum lease payments 309 297

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16. Income tax

Income tax expenses for the years ended December 31 comprise the following:

20172016

(restated)

Current income tax 123 39Prior period adjustments (3) (4)Current income tax expense 120 35

Deferred tax relating to the origination and reversal of temporary differences (22) 79Deferred income tax (benefit)/expense (22) 79

Total income tax expense 98 114

In 2017 and 2016, the Company’s subsidiaries domiciled in the Russian Federation applied the standard Russianincome tax rate of 20%, except for applicable regional tax relief. The income tax rates applicable for subsidiariesincorporated in other jurisdictions may vary from 20% and are calculated according to local regulations.

Temporary differences between these consolidated financial statements and tax records gave rise to thefollowing deferred income tax assets and liabilities:

Consolidated balance sheetas of December 31,

Consolidated statement ofprofit or loss for the years,

ended December 31,

20172016

(restated) 20172016

(restated)

Other short-term financial assets 2 6 (2) 3Short-term accounts receivable 7 7 – 2Property, plant and equipment 14 10 4 2Short-term accounts payable and accrued liabilities 13 9 4 –Other current liabilities 16 20 (4) (3)Long-term loans and borrowings and other

financial liabilities 4 5 (1) (1)Long-term provisions 9 10 (1) –Tax loss carry forward 58 29 28 (69)Other 9 8 1 1Less: deferred tax liabilities offset (106) (82) – –Deferred tax assets 26 22 29 (65)

Short-term accounts receivable (1) (6) 5 (5)Inventories (13) (10) (3) (4)Property, plant and equipment (615) (596) (15) (11)Mineral rights (267) (261) 7 7Intangible assets (4) (5) 1 3Investments in associates and joint ventures (10) (9) (1) (2)Other (9) (8) (1) (2)Less: deferred tax assets offset 106 82 – –Deferred tax liabilities (813) (813) (7) (14)

Deferred income tax (expense)/benefit 22 (79)

Net deferred tax liabilities (787) (791)

Recognized in the consolidated balancesheet as following

Deferred tax assets 26 22Deferred tax liabilities (813) (813)

Net deferred tax liabilities (787) (791)

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16. Income tax (continued)

The reconciliation of net deferred tax liabilities is as follows:

20172016

(restated)

As of January 1 (791) (557)Deferred income tax (expense)/benefit, recognized in the consolidated

statement of profit or loss 22 (79)Acquisition of subsidiaries and shares in joint operations (Note 7) (13) (157)Deferred tax expenses recognized in other comprehensive income (5) 2

As of December 31 (787) (791)

The reconciliation between tax expense and the product of accounting profit multiplied by the 20% tax rate forthe years ended December 31 is as follows:

20172016

(restated)

Income before income tax 395 306Income tax at statutory rate of 20% 79 61

Increase/(decrease) resulting from:Effect of change in unrecognized deferred tax assets 4 6Effect of income tax rates in other jurisdictions 2 4Effect of special tax treatments 2 3Effect of income tax relief (12) (16)Effect of equity share in profits of associates and joint ventures (8) (3)Effect of tax on intercompany dividends 1 7Effect of tax on controlled investments in foreign subsidiaries 2 –Effect from goodwill write-off 1 –Effect from disposal of a subsidiary (1) –Effect from sale of shares in subsidiaries – 38Effect from restructuring of joint ventures – (6)Effect of prior period adjustments 1 1Effect of non-taxable income and non-deductible expenses 27 19

Income tax 98 114

Unrecognized deferred tax assets in the consolidated balance sheet for the years ended December 31, 2017 and2016 amounted to RUB 55 billion and RUB 48 billion, respectively, related to unused tax losses. In respect ofrecognized deferred tax assets on tax losses carried forward management considers it probable that futuretaxable profits will be available for the Company against which these tax losses can be utilized.

The total amount of temporary differences associated with investment in subsidiaries, for which deferred taxliabilities have not been recognized, amounted RUB 653 billion as of December 31, 2017.

In 2014 certain amendments were introduced in Russian tax legislation in respect of the profit of controlledforeign companies and income of foreign entities. According to these changes undistributed profit of foreignsubsidiaries recognized as controlled foreign companies may form an additional tax base for Rosneft and forcertain Russian subsidiaries holding investments in foreign entities. In particular, undistributed 2017 profits ofcontrolled foreign companies are included in the Company’s tax base as of December 31, 2018 and recordedin the tax declaration. The consequences of taxation of controlled foreign companies are accounted for withincurrent and deferred tax liabilities.

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17. Non-controlling interests

Non-controlling interests include:

As of December 31, 2017 2017 As of December 31, 2016 2016

Non-controlling

interest(%)

Non-controlling

interestas of the endof the year

Non-controllinginterest innet income

Non-controlling

interest(%)

Non-controlling

interestas of the endof the year(restated)

Non-controllinginterest innet income(restated)

PJSC Bashneft Oil Company 39.67 221 40 39.67 191 –JSC Vankorneft 49.90 140 28 49.90 141 13LLC Taas-Yuriakh

Neftegazodobycha 49.90 104 3 49.90 92 2PJSC Verkhnechonskneftegaz 20.05 43 3 0.06 – –LLC Sorovskneft 39.67 20 1 39.67 19 –PJSC Ufaorgsintez 42.66 19 1 42.66 18 –LLC Bashneft-Dobycha 39.67 7 1 39.67 6 –Non-controlling interests in

other entities various 10 (2) various 13 3

Total non-controlling interests 564 75 480 18

On June 29, 2017 the Company completed the sale of a 20% share in PJSC Verkhnechonskneftegaz,a subsidiary, to Beijing Gas Singapore Private Limited, a subsidiary of Beijing Gas Group Co., Ltd. for aconsideration of US$ 1.1 billion (RUB 65 billion at the CBR official exchange rate at the transaction closingdate).

In May 2016 the Company sold a 15% share in its subsidiary JSC Vankorneft to Oil and Natural GasCorporation Videsh Limited for a consideration of RUB 72 billion.

In October 2016 the Company sold a 23.9% share in JSC Vankorneft to a consortium of companies, includingOil India Ltd, Indian Oil Corporation and Bharat Petroresources (the “Consortium”) for a consideration ofRUB 111 billion.

In October 2016 the Company sold an 11% share in JSC Vankorneft to a subsidiary of Oil and Natural GasCorporation Videsh Limited for a consideration of RUB 52 billion.

In October 2016 the Company sold a 29.9% share in its subsidiary LLC Taas-Yuriakh Neftegazodobycha tothe Consortium for a consideration of RUB 73 billion.

In October 2016 the Company acquired 50.0755% of shares in PJSC Bashneft Oil Company for a cashconsideration of RUB 330 billion. The total non-controlling interest in PJSC Bashneft Oil Company and itssubsidiaries recognized at the acquisition date, including the outcome of the voluntary offer to acquirePJSC Bashneft Oil Company ordinary shares held by minority shareholders, amounted to RUB 234 billion(Note 7). The total non-controlling interest in PJSC Bashneft Oil Company and its subsidiaries is valued at thefair value at the date of acquisition.

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17. Non-controlling interests (continued)

The summarized financial information of subsidiaries that have material non-controlling interests is providedbelow. This information is based on amounts before inter-company eliminations.

Summarized statement ofcomprehensive income for 2017

PJSC BashneftOil Company JSC Vankorneft

LLC Taas-YuriakhNeftegazodobycha

Revenues 614 330 29Costs and other income and expenses (486) (260) (21)Income before income tax 128 70 8

Income tax expense (27) (12) (2)

Net income 101 58 6

incl. attributable to non-controlling interests 40 28 3

Summarized statement ofcomprehensive income for 2016

PJSC BashneftOil Company*

(restated) JSC VankorneftLLC Taas-YuriakhNeftegazodobycha

Revenues 135 299 25Costs and other income and expenses (136) (202) (19)Income before income tax (1) 97 6

Income tax expense – (16) (1)

Net income (1) 81 5

incl. attributable to non-controlling interests – 13 2

* From the acquisition date.

Summarized balance sheetas at December 31, 2017

PJSC BashneftOil Company JSC Vankorneft

LLC Taas-YuriakhNeftegazodobycha

Current assets 324 71 11Non-current assets 792 292 215

Total assets 1,116 363 226

Current liabilities 234 36 7Non-current liabilities 234 35 28Equity 648 292 191

Total equity and liabilities 1,116 363 226

incl. non-controlling interests 221 140 104

Summarized balance sheetas at December 31, 2016

PJSC BashneftOil Company

(restated) JSC VankorneftLLC Taas-YuriakhNeftegazodobycha

Current assets 212 99 12Non-current assets 832 266 189

Total assets 1,044 365 201

Current liabilities 205 35 7Non-current liabilities 265 36 27Equity 574 294 167

Total equity and liabilities 1,044 365 201

incl. non-controlling interests 191 141 92

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18. Earnings per share

For the years ended December 31 basic and diluted earnings per share comprise the following:

20172016

(restated)

Net income attributable to shareholders of Rosneft 222 174Weighted average number of issued common shares outstanding (millions) 10,598 10,598

Total basic and diluted earnings per share (RUB) 20.95 16.42

19. Cash and cash equivalents

Cash and cash equivalents consist of the following:

As of December 31,2017 2016

Cash on hand and in bank accounts in RUB 44 25Cash on hand and in bank accounts in foreign currencies 124 153Deposits and other cash equivalents in RUB 142 609Other 12 3

Total cash and cash equivalents 322 790

Cash accounts denominated in foreign currencies represent primarily cash in U.S. dollars.

Deposits are interest bearing and denominated primarily in RUB.

Restricted cash includes the obligatory reserve of subsidiary banks with the CBR in the amount ofRUB 4 billion and RUB 2 billion as of December 31, 2017 and 2016, respectively.

20. Other short-term financial assets

Other short-term financial assets comprise the following:

As of December 31,

20172016

(restated)Financial assets available-for-saleBonds and promissory notes 135 116Stocks and shares 44 187

Financial assets held-to-maturityBonds 1 2

Loans and accounts receivableLoans granted 13 4Loans issued to associates 32 22Notes receivable, net of allowance 66 55Loans granted under reverse repurchase agreements – 2Deposits and certificates of deposit 44 54

Held-for-trading financial assets at fair value through profit or lossCorporate bonds – 2State bonds 1 2

Total other short-term financial assets 336 446

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20. Other short-term financial assets (continued)

As of December 31, 2017 and 2016 available-for-sale bonds and notes comprise the following:

Type of security

2017 2016

BalanceInterest rate

p.a.Date

of maturity BalanceInterest rate

p.a.Date

of maturity

State and municipal bonds 33 5.0-14.15% January 2018 –March 2033

65 7.5-14.15% October 2017 –March 2030

Corporate bonds 79 3.08-14.25% January 2018 –September 2032

31 3.72-12.85% January 2017 –September 2032

Bank of Russia bonds 4 7.75% January 2018 –Promissory notes 19 4.37% September 2018 20 11.7% December 2021

Total 135 116

As of December 31, 2017 and 2016 held-to-maturity bonds comprise the following:

Type of security

2017 2016


p.a.Date


p.a.Date

of maturity

State and municipal bonds 1 7.7-11.4% July 2018 –December 2034

1 7.94-12.1% June 2017 –November 2019

Corporate bonds – 1 5.38-6.0% February 2017 –April 2017

Total 1 2

As of December 31, 2017, notes receivable include corporate notes receivable that are denominated inU.S. dollars with a nominal interest rate from 3.8% to 4.5% p.a. and maturity through January 2022, as wellas discounted corporate notes receivable that are denominated in U.S. dollars with a rate of return of 4.5% p.a.and maturity through February 2018.

As of December 31, 2016, notes receivable include corporate notes receivable that are denominated in eurowith a nominal interest rate of 2.845% p.a. and maturity through April 2017, as well as discounted corporatenotes receivable that are denominated in U.S. dollars with a rate of return of 4.5% p.a. and maturity throughFebruary 2017.

As of December 31, 2017, deposits and certificates of deposit denominated in U.S. dollars amount toRUB 39 billion and earn interest ranging from 2.0% to 3.7% p.a. Deposits and certificates of depositdenominated in RUB amount to RUB 3 billion and bear interest rates ranging from 7.2% to 7.56% p.a.

As of December 31, 2016, deposits and certificates of deposit denominated in U.S. dollars amount toRUB 47 billion and earn interest ranging from 1.1% to 4.0% p.a. Deposits and certificates of depositdenominated in RUB amount to RUB 7 billion and bear interest rates ranging from 9.9% to 14.0% p.a.

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20. Other short-term financial assets (continued)

As of December 31, 2017 and 2016 trading securities comprise the following:

Type of security

2017 2016


p.a.Date


p.a.Date

of maturity

State and municipal bonds 1 7.28-10.9% July 2018 –July 2021

2 2.5-10.9% April 2017 –August 2023

Corporate bonds – 2 5.38-11.7% February 2017 –September 2032

Total 1 4

21. Accounts receivable

Accounts receivable include the following:

As of December 31,

20172016

(restated)

Trade receivables 658 437Banking loans to customers 108 50Other accounts receivable 116 29Total 882 516

Allowance for doubtful accounts (39) (30)

Total accounts receivable, net of allowance 843 486

The allowance for doubtful accounts is recognized at each balance sheet date based on estimates of theCompany’s management regarding the expected cash inflows to repay accounts receivable.

The Company recognized an allowance for doubtful accounts for all significant past due accounts receivableas of December 31, 2017 and 2016.

As of December 31, 2017 and 2016 accounts receivable were not pledged as collateral for loans and borrowingsprovided to the Company.

22. Inventories

Inventories comprise the following:


Crude oil and gas 88 67Petroleum products and petrochemicals 158 137Materials and supplies 78 79

Total 324 283

Petroleum products and petrochemicals include those designated both for sale and for own use.

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22. Inventories (continued)

For the years ended December 31:

2017 2016

Cost of inventories recognized as an expense during the period 977 795

The cost of inventories recognized as an expense during the period is included in Production and operatingexpenses, Cost of purchased oil, gas, petroleum products and refining costs, and General and administrativeexpenses in the consolidated statement of profit or loss.

23. Prepayments and other current assets

Prepayments comprise the following:


Value added tax and excise receivable 180 166Prepayments to suppliers 210 64Settlements with customs 37 29Profit and other tax payments 19 23Other 8 11

Total prepayments and other current assets 454 293

Settlements with customs primarily represent export duties related to the export of crude oil and petroleumproducts (Note 10).

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24. Property, plant and equipment and construction in progress

Explorationand production

Refining anddistribution

Corporate andother unallocated

activities Total

Cost as of January 1, 2016 (restated) 6,410 1,525 94 8,029Depreciation, depletion and impairment losses as of

January 1, 2016 (restated) (1,849) (289) (32) (2,170)Net book value as of January 1, 2016 (restated) 4,561 1,236 62 5,859

Prepayments for property, plant and equipmentas of January 1, 2016 9 27 6 42

Total as of January 1, 2016 (restated) 4,570 1,263 68 5,901

CostAcquisitions of subsidiaries and shares in joint

operations (Note 7) 542 445 15 1,002Additions 652 116 27 795including capitalized expenses on loans and

borrowings 46 17 1 64Disposals and other movements (40) (23) (12) (75)Foreign exchange differences (73) (11) (5) (89)Cost of asset retirement (decommissioning)

obligations 22 – – 22As of December 31, 2016 (restated) 7,513 2,052 119 9,684

Depreciation, depletion and impairment lossesDepreciation and depletion charge (403) (87) (5) (495)Disposals and other movements 25 4 6 35Impairment of assets (1) (1) – (2)Foreign exchange differences 54 2 1 57As of December 31, 2016 (restated) (2,174) (371) (30) (2,575)

Net book value as of December 31, 2016 (restated) 5,339 1,681 89 7,109

Prepayments for property, plant and equipment as ofDecember 31, 2016 21 16 5 42

Total as of December 31, 2016 (restated) 5,360 1,697 94 7,151

CostAcquisitions of subsidiaries and shares in joint

operations (Note 7) 277 – 4 281Additions 948 125 20 1,093including capitalized expenses on loans and

borrowings 105 39 – 144Disposals and other movements (25) (17) (2) (44)Foreign exchange differences (23) 12 (2) (13)Cost of asset retirement (decommissioning)

obligations 29 – – 29As of December 31, 2017 8,719 2,172 139 11,030

Depreciation, depletion and impairment lossesDepreciation and depletion charge (474) (113) (9) (596)Disposals and other movements 11 8 1 20Impairment of assets (4) (2) (7) (13)Foreign exchange differences 13 – 1 14As of December 31, 2017 (2,628) (478) (44) (3,150)

Net book value as of December 31, 2017 6,091 1,694 95 7,880

Prepayments for property, plant and equipment as ofDecember 31, 2017 9 7 27 43

Total as of December 31, 2017 6,100 1,701 122 7,923

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24. Property, plant and equipment and construction in progress (continued)

The cost of construction in progress included in property, plant and equipment was RUB 2,013 billion andRUB 1,570 billion as of December 31, 2017 and 2016, respectively.

The depreciation charge for the years ended December 31, 2017 and 2016 includes depreciation which wascapitalized as part of the construction cost of property, plant and equipment and the cost of inventory in theamount of RUB 15 billion and RUB 13 billion, respectively.

As of December 31, 2016 and 2015, certain items of property, plant and equipment previously allocated to theRefining and distribution and the Corporate and other unallocated activities segments were reallocated to theExploration and production and Refining and distribution segments due to amendments to the managementstructure.

The Company capitalized RUB 144 billion (including RUB 117 billion in capitalized interest expense) andRUB 64 billion (including RUB 64 billion in capitalized interest expense) of expenses on loans and borrowingsin 2017 and 2016, respectively.

During 2017 and 2016 the Company received government grants for capital expenditures in the amount ofRUB 8 billion and RUB 8 billion, respectively. Grants are accounted for as a reduction of additions in theExploration and production segment.

Exploration and evaluation assets

Exploration and evaluation assets included in the Exploration and production segment, including mineral rightsto unproved properties, comprise the following:

2017 2016 (restated)

Cost as of January 1 243 251Impairment losses as of January 1 – (13)

Net book value as of January 1 243 238

CostAcquisition of subsidiaries (Note 7) 47 7Acquisition of interest in joint arrangements 37 –Capitalized expenditures 71 26Reclassified to development assets (8) (18)Expensed (2) (5)Utilization of impairment reserve – (13)Foreign exchange differences (2) (5)As of December 31 386 243

Impairment lossesUtilization/(accrual) of impairment reserve – 13As of December 31 – –

Net book value as of December 31 386 243

Provision for asset retirement (decommissioning) obligations

The provision for asset retirement (decommissioning) obligations was RUB 98 billion and RUB 99 billion asof December 31, 2017 and 2016, respectively, and included in Property, plant and equipment.

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25. Intangible assets and goodwill

Intangible assets and goodwill comprise the following:

Rights forland lease

Otherintangible

assets

Totalintangible

assets Goodwill

Cost as of January 1, 2016 36 30 66 230Amortization as of January 1, 2016 (12) (6) (18) –

Net book value as of January 1, 2016 24 24 48 230

CostAdditions − 19 19 −Acquisition of subsidiaries (Note 7) − 3 3 26Disposals (1) (4) (5) −Foreign exchange differences (1) − (1) −As of December 31, 2016 (restated) 34 48 82 256

AmortizationAmortization charge (2) (5) (7) −Disposal of amortization − 1 1 −Foreign exchange differences 1 − 1 −As of December 31, 2016 (restated) (13) (10) (23) −Net book value as of December 31, 2016

(restated) 21 38 59 256

CostAdditions – 10 10 –Acquisition of subsidiaries (Note 7) – 26 26 13Disposals – (18) (18) (4)Foreign exchange differences – – – –As of December 31, 2017 34 66 100 265

AmortizationAmortization charge (2) (5) (7) –Disposal of amortization – 1 1 –Foreign exchange differences – – – –As of December 31, 2017 (15) (14) (29) –

Net book value as of December 31, 2017 19 52 71 265

The Company performs its annual goodwill impairment test as of October 1 of each year. The impairment testis carried out at the beginning of the fourth quarter of each year using the data that was appropriate at that time.The excess of fair value over identified net assets comprised RUB 1,639 billion and RUB 239 billion for theExploration and production and Refining and distribution segments, respectively. As a result of the annual test,no impairment of goodwill was identified in 2017 and 2016.

Goodwill acquired through business combinations is allocated to the relevant groups of cash generating unitsthat are its operating segments – the Exploration and production segment and the Refining and distributionsegment. In assessing whether goodwill has been impaired, the current values of the operating segments(including goodwill) were compared with their estimated value in use.

As of December 31,

20172016

(restated)GoodwillExploration and production 85 76Refining and distribution 180 180

Total 265 256

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25. Intangible assets and goodwill (continued)

The Company has estimated the value in use of the operating segments using a discounted cash flow model.Future cash flows have been adjusted for risks specific to each segment and discounted using a rate that reflectscurrent market assessments of the time value of money and the risks specific to each segment, for which thefuture cash flow estimates have not been adjusted.

The Company’s business plan, approved by the Company’s Board of Directors, is the primary source ofinformation for the determination of the operating segments’ value in use. The business plan contains internalforecasts of oil and gas production, refinery throughputs, sales volumes of various types of refined products,revenues, operating and capital expenditures. As an initial step in the preparation of these plans, variousassumptions, such as oil prices, natural gas prices, refining margins, petroleum product margins and costinflation rates, are set. These assumptions take into account existing prices, U.S. dollar and RUB inflationrates, other macroeconomic factors and historical trends, as well as market volatility.

In determining the value in use for each of the operating segments, twelve-year period cash flows calculatedon the basis of the Company management’s forecasts have been discounted and aggregated with the segments’terminal value. The use of a forecast period longer than five years originates from the industry’s averageinvestment cycle. In determining the terminal value of the Company’s segments in the post-forecast period theGordon model was used.

Key assumptions applied to the calculation of value in use

Discounted cash flows are most sensitive to changes in the following factors:

· The discount rate

The discount rate calculation is based on the Company’s weighted average cost of capital adjusted toreflect the pre-tax discount rate and amounts to 12.4% p.a. in 2017 (13.4% p.a. in 2016).

· The estimated average annual RUB / U.S. dollar exchange rate

The average annual RUB / U.S. dollar exchange rate applied was as follows: RUB 64.7 for 2018,RUB 66.9 for 2019, RUB 68.0 for 2020 and RUB 67.0 from 2021 onwards.

· Oil and petroleum products prices

The forecasted Urals oil price applied was as follows: RUB 2,834 per barrel for 2018, RUB 2,783 perbarrel for 2019, RUB 2,883 per barrel for 2020 and RUB 3,015 per barrel from 2021 onwards. TheCompany’s petroleum products price forecasts with regard to the main sales destinations are based onthese oil prices with a weighted average price of petroleum products (excluding petrochemicals) ofRUB 25.9 thousand per tonne, RUB 25.7 thousand per tonne, RUB 27.0 thousand per tonne andRUB 28.6 thousand per tonne for 2018, 2019, 2020 and from 2021 onwards, respectively.

· Production volumes

Estimated production volumes were based on detailed data for the fields and take into account the fielddevelopment plans approved by management through the long-term planning process.

Sensitivity to changes in assumptions

The effects of changes in key assumptions are as follows:

Changes in the pre-tax weighted average cost of capital – the long-term increase in the weighted average costof capital above 12.8% may have a significant effect on the discounted cash flows of the Refining anddistribution segment and may lead to the segment’s goodwill impairment.

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25. Intangible assets and goodwill (continued)

Sensitivity to changes in assumptions (continued)

Changes in oil and petroleum products prices – the long-term decrease in oil prices below RUB 2,901 perbarrel for the period 2018 onwards may have a significant effect on the discounted cash flows of the Refiningand distribution segment and may lead to the segment’s goodwill impairment. A similar effect can be causedby a long-term decrease (in the forecast period from 2018 onwards) in the weighted average price of petroleumproducts (excluding petrochemicals) below RUB 27.9 thousand per tonne with oil prices at forecast levels.

Changes in tax regime – the Russian oil industry tax regime has a significant influence on the rate of return ofthe Refining and distribution segment’s refining operations. In case the current tax regime remains unchangedin the long-term, there is a possibility that estimated discounted cash flows will decrease resulting in a goodwillimpairment of the segment.

As of December 31, 2017 and 2016 the Company did not have any intangible assets with indefinite usefullives. As of December 31, 2017 and 2016 no intangible assets have been pledged as collateral.

26. Other long-term financial assets

Other long-term financial assets comprise the following:


Bonds 13 1Bank deposits 542 494Financial assets available for sale:

Shares of PJSC INTER RAO UES 4 5Shares of PJSC Russian Grids 1 2Shares of JSC Modern Shipbuilding Technology 11 4

Long-term loans issued to associates and joint ventures 25 287Long-term loans 5 12Other 5 3

Total other long-term financial assets 606 808

Bank deposits of the Company are listed in rubles, US dollars and euros at interest rates ranging from 4.9% to7.9% p.a.

Bonds consist of by federal loan bonds and are held on the balance sheet of JSCB Peresvet.

As of December 31, 2017 and 2016, there were no overdue long-term financial assets for which no impairmentprovision was created.

No long-term financial assets were pledged as collateral as of December 31, 2017 and 2016.

As of December 31, 2017 and 2016, no long-term financial assets were received by the Company as collateral.

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27. Investments in associates and joint ventures

Investments in associates and joint ventures comprise the following:

Name of investee Country

Company’s shareas of December 31,

2017, %As of December 31,

2017 2016

Joint venturesRosneft-Shell Caspian Ventures Limited Russia 51.00 – 1Taihu Ltd (OJSC Udmurtneft) Cyprus 51.00 47 41Fuel-filling complex of Vnukovo

(Lanard Holdings Limited) Russia 50.00 18 18Arktikshelfneftegaz CJSC Russia 50.00 2 2National Oil Consortium LLC Russia 80.00 24 24OJSC NGK Slavneft Russia 49.94 156 149TNK Trading International S.A. Switzerland 59.95 – 6SIA ITERA Latvija Latvia 66.00 4 3PetroMonagas S.A. Venezuela 40.00 46 41PETROVICTORIA S.A. Venezuela 40.00 25 26Nizhnevartovskaya TPP JSC (NVGRES

Holdings Limited ) Russia 25.01 4 6RN Pechora LLC Russia 50.10 8 8Messoyahaneftegaz JSC Russia 50.00 15 –

AssociatesPetrocas Energy International Ltd Cyprus 49.00 9 8Purgaz CJSC Russia 49.00 39 39Essar Oil Limited India 49.13 227 18Other associates various various 14 21

Total associates and joint ventures 638 411

The equity share in profits/(losses) of associates and joint ventures comprises the following:

Company’s shareas of December 31,

2017, %

Share in income/(loss)of equity investees

2017 2016

Taihu Ltd 51.00 7 10OJSC NGK Slavneft 49.94 7 5Messoyahaneftegaz JSC 50.00 11 (1)National Oil Consortium LLC 80.00 1 (1)PetroMonagas S.A. 40.00 8 2Petroperija S.A. 40.00 5 –Boqueron S.A. 26.66 4 –TNK Trading International S.A. 59.95 10 6Essar Oil Limited 49.13 5 –Petrocas Energy International Ltd 49.00 1 –Other various 1 5Total equity share in profits of associates and joint

ventures 60 26

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27. Investments in associates and joint ventures (continued)

The unrecognized share of losses of associates and joint ventures comprises the following:

Name of investeeAs of December31,

2017 2016

LLC Veninneft 2 2LLP Adai Petroleum Company 7 6Boqueron S.A. 6 1Petroperija S.A. 3 –

Total unrecognized share of losses of associates and joint ventures 18 9

Financial information of significant associates and joint ventures as of December 31, 2017 and 2016 ispresented below:

As of December 31,Taihu Ltd 2017 2016

Cash and cash equivalents 21 10Accounts receivable 19 12Other current assets 2 2Other non-current assets 89 86Total assets 131 110

Short-term loans and borrowings – (3)Income tax liabilities – –Other current liabilities (17) (14)Long-term loans and borrowings (1) –Deferred tax liabilities (5) (6)Other non-current liabilities (9) (7)Total liabilities (32) (30)

Net assets 99 80

One-off adjustment in accordance with the joint-stock agreement (6) –

The Company’s share, % 51.00 51.00

The Company’s total share in net assets 47 41

Taihu Ltd 2017 2016

Revenues 114 101Finance income 1 –Finance expenses (1) (1)Depreciation, depletion and amortization (5) (5)Other expenses (84) (70)Income before income tax 25 25

Income tax (5) (5)

Net income 20 20

One-off adjustment in accordance with the joint-stock agreement (6) –


The Company’s total share in net income 7 10

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66

27. Investments in associates and joint ventures (continued)

The Company’s share of the currency translation effect amounted to a loss of RUB 1 billion and an income ofRUB 2 billion for the years ended December 31, 2017 and 2016, respectively, which was included in foreignexchange differences in the translation of foreign operations in the consolidated statement of othercomprehensive income for 2017 and 2016.

As of December 31,OJSC NGK Slavneft 2017 2016

Cash and cash equivalents 4 4Accounts receivable 45 11Other current assets 11 11Other non-current assets 447 425Total assets 507 451

Short-term loans and borrowings (10) (27)Tax liabilities (27) (23)Other current liabilities (29) (23)Long-term loans and borrowings (88) (43)Deferred tax liabilities (19) (17)Other non-current liabilities (22) (19)Total liabilities (195) (152)

Net assets 312 299


The Company’s total share in net assets 156 149

OJSC NGK Slavneft 2017 2016

Revenues 241 215Finance income 1 2Finance expenses (7) (7)Depreciation, depletion and amortization (47) (52)Other expenses (171) (141)Gain before income tax 17 17

Income tax (4) (6)

Net income 13 11


The Company’s total share in net income 7 5

Investments in Essar Oil Limited

In August 2017 the Company completed the acquisition of a 49% stake in Essar Oil Limited, a modern oilrefinery in the Asia-Pacific region in Vadinar, India, with integrated infrastructure. Essar Oil Limited owns alarge petrol station chain in India operating under the Essar brand. The acquisition price totaled US$ 3.9 billion(RUB 230 billion at the CBR official exchange rates at the payment dates).

Investments in Venezuela

In May 2016 the Company increased its stake in the Petromonagas joint venture with the state oil company ofVenezuela Petróleos de Venezuela SA (“PDVSA”) from 16.7% to 40%. The share of PDVSA was reduced to60%. The cost of the additional share acquisition was US$ 500 million (RUB 33 billion at the CBR officialexchange rate at the date of the transaction).

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28. Other non-current non-financial assets

Other non-current non-financial assets comprise the following:


Long-term advances issued 282 83Other 3 1

Total other non-current non-financial assets 285 84

In April 2017 the Company made an advance payment of US$ 1.0 billion (RUB 57 billion at the CBR officialexchange rate at the transaction date) under a Petróleos de Venezuela, S.A. crude oil purchase contract. Duringthe year 2017 the Company made advance payments totaling US$ 2.1 billion (RUB 122 billion at the CBRofficial exchange rates at the transaction dates) under a Kurdistan Government crude oil purchase contract.

29. Accounts payable and accrued liabilities

Accounts payable and accrued liabilities comprise the following:

As of December 31,

20172016

(restated)Financial liabilitiesAccounts payable to suppliers and contractors 451 337Current operating liabilities of subsidiary banks 333 134Voluntary offer to acquire PJSC Bashneft Oil Company shares – 50Salary and other benefits payable 81 80Dividends payable 5 –Other accounts payable 46 22Total financial liabilities 916 623

Non-financial liabilitiesShort-term advances received 55 53

Total accounts payable and accrued liabilities 971 676

Trade and other payables are non-interest bearing.

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30. Loans and borrowings and other financial liabilities

Loans and borrowings comprise the following:

As of December 31,

Currency 20172016

(restated)Long-termBank loans RUB 326 173Bank loans US$, euro 878 1,107Bonds RUB 427 321Eurobonds US$ 213 337Borrowings RUB 71 31Borrowings euro – 1Other borrowings US$ 224 613Other borrowings RUB 16 16Less: current portion of long-term loans and borrowings (545) (710)Long-term loans and borrowings 1,610 1,889

Finance lease liabilities 32 22Other long-term financial liabilities 146 4Less: current portion of long-term finance lease liabilities (5) (1)Total long-term loans and borrowings and other financial

liabilities 1,783 1,914

Short-termBank loans RUB 237 101Bank loans US$, euro 10 21Borrowings US$ – 33Other borrowings RUB 919 516Other borrowings US$ 346 94Current portion of long-term loans and borrowings 545 710Short-term loans and borrowings and current portion

of long-term loans and borrowings 2,057 1,475

Current portion of long-term finance lease liabilities 5 1Other short-term financial liabilities 93 4Short-term liabilities related to derivative financial

instruments 74 98Total short-term loans and borrowings and other

financial liabilities 2,229 1,578

Total loans and borrowings and other financial liabilities 4,012 3,492

Long-term loans and borrowings

Long-term bank loans comprise the following:

Currency Interest rate p.a.Maturity

dateAs of December 31,

2017 2016

US$ LIBOR + 1.00% – LIBOR + 3.50% 2018-2029 869 1,081EUR EURIBOR + 0.35% – EURIBOR + 2.00% 2019-2020 10 27RUB 8.30% – 9.75% 2018-2024 326 173Total 1,205 1,281

Debt issue costs (1) (1)

Total long-term bank loans 1,204 1,280

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30. Loans and borrowings and other financial liabilities (continued)

Long-term loans and borrowings (continued)

Long-term bank loans from foreign banks to finance special-purpose business activities denominated inUS$ are partially secured by oil export contracts. If the Company fails to make timely debt repayments, theterms of such contracts normally provide the lender with the express right of claim to contractual revenue inthe amount of the late loan repayments, which the purchaser generally remits directly through transit currencyaccounts with the lender banks. The outstanding balance of Accounts receivable arising from such contractsamounts to RUB 22 billion and RUB 24 billion as of December 31, 2017 and 2016, respectively, and isincluded in Trade receivables of purchasers and customers.

In March 2013, the Company drew down four long-term unsecured loans from a group of international banksfor a total of US$ 31 billion to finance the acquisition of TNK-BP. Two of these four loans were fully repaidin previous years. In December 2017 the Company fully repaid the third one. As of December 31, 2017 thetotal debt and accrued interest on the outstanding loan with a floating rate and maturity in February 2018amounted to US$ 0.2 billion (RUB 11.3 billion at the CBR official exchange rate as of December 31, 2017),including accrued interest.

For the year ended 31 December 2017, the Company drew down long-term funds from Russian banks: undera floating rate with repayable periods in 2020-2022 and 2024, and fixed rate loans with repayable periods in2020-2023.

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Interest-bearing RUB denominated bearer bonds in circulation comprise the following:

Security IDDate of

issueTotal volume in

RUB billionsCoupon

(%)

As of December 31,Date of

maturity 2017 2016

Bonds 04,05 10.2012 10.20221 20 7.90% 20 20Bonds 07,08 03.2013 03.2023 30 8.00% 31 31Bonds 06,09,10 06.2013 05.2023 40 7.95% 40 40SE Bonds 4 БО-05, БО-06 12.2013 12.2023 40 7.95% 11 11SE Bonds БО-01, БО-07 02.2014 02.2024 35 8.90% 36 36SE Bonds БО-02, БО-03, БО-04

БО-094 12.2014 11.20241 65 9.40%5 55 56SE Bonds БО-08, БО-10

БО-11, БО-12, БО-13БО-14 12.2014 11.20241 160 9.40%5 – –

SE Bonds4 БО-15, БО-16БО-17, БО-24 12.20142 12.20201 400 7.85%5 – –

SE Bonds4 БО-18, БО-19, БО-20БО-21, БО-22, БО-23

БО-25, БО-26 01.20152 01.2021 400 8.60%5 – –SE Bonds4 001Р-01 12.20162 11.2026 600 8.35%5 – –SE Bonds 001Р-02 12.2016 12.2026 30 9.39%5 30 30SE Bonds 001Р-03 12.2016 12.20261 20 9.50%5 20 20SE Bonds 001Р-04 05.2017 04.2027 40 8.65%5 41 –SE Bonds 001Р-05 05.20172 05.20251 15 8.60%5 15 –SE Bonds4 001Р-06, 001Р-07 07.2017 07.2027 266 8.50%5 – –SE Bonds4 001Р-08 10.2017 09.2027 100 8.60%5 – –SE Bonds4 002Р-01, 002Р-02 12.2017 11.2027 600 8.35%5 – –SE Bonds 002Р-03 12.2017 12.2027 30 7.75%5 30 –

Bonds of subsidiary banks:SE Bonds 001Р-01 10.2017 10.20201 10 8.50%5 10 –SE Bonds БО-02 08.20143 08.20341 3 0.51%5 – –SE Bonds БО-03 07.20153 06.20351 4 0.51%5 – –SE Bonds БО-04 04.20152 04.20181 3 13.25%5 3 –SE Bonds БО-П01 09.20153 08.20351 5 0.51%5 – –SE Bonds БО-П02 10.20153 09.20351 4 0.51%5 1 –SE Bonds БО-П03 11.20153 10.20351 1 0.51%5 – –SE Bonds БО-П05 06.20163 06.20361 5 0.51%5 – –Convertible Bonds С-01 02.20173 02.20321 69 0.51%5 2 –

Bashneft SE Bonds:Bonds 046 02.2012 02.2022 10 0.10%5 – –Bonds 06, 08 02.2013 01.2023 15 8.65%5 15 15Bonds 07, 09 02.2013 01.2023 15 8.85%5 16 16SE Bonds БО-056 05.2014 05.2024 10 10.70% – –SE Bonds БО-036 05.2015 05.2025 5 12.00% – –SE Bonds БО-046 06.2015 05.2025 5 12.00% – –SE Bonds БО-076 06.2015 06.2025 5 12.10% – –SE Bonds БО-026 05.2016 05.2026 10 10.50% – –SE Bonds БО-06, БО-08 05.2016 04.2026 15 10.90%5 16 16SE Bonds БО-09 10.2016 10.2026 5 9.30%5 5 5SE Bonds БО-10 12.2016 12.2026 5 9.50%5 5 5SE Bonds 001P-01R 12.2016 12.20241 10 9.50%5 10 10SE Bonds 001P-02R 12.2016 12.20231 10 9.50%5 10 10SE Bonds 001P-03R 01.2017 01.20241 5 9.40%5 5 –

Total long-term RUB bonds 427 321

1 Early repurchase at the request of the bond holder is not allowed.2 Coupon payments every three months.3 Coupon payments at the maturity day.4 On the reporting date these issues are partially used as an instrument for other borrowings under repurchasing agreement operations.5 For the coupon period effective as of December 31, 2017.6 For the coupon period effective as of day of early repurchase.

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All of the bonds, excluding certain issues, allow early repurchase at the request of the bond holder as set in therespective offering documents. In addition, the issuer, at any time and at its discretion, may purchase/repay thebonds early with the possibility of subsequently placing the bonds in the market. Such purchase/repayment ofthe bonds does not constitute an early redemption.

Certain RUB denominated non-convertible bonds were acquired through the acquisitions of PJSC BashneftOil Company and JSCB Peresvet (Note 7).

Through the JSCB Peresvet acquisition the Company reported RUB denominated bonds with couponpayments at the end of the redemption and maturity periods of 3, 15 and 20 years. Part of the RUB denominatedbonds series С01 consisted of convertible bonds.

Corporate Eurobonds comprise the following:

Coupon rate(%) Currency Maturity


Eurobonds (Series 1) 3.149% US$ 2017 – 61Eurobonds (Series 2) 4.199% US$ 2022 117 123Eurobonds (Series 4) 6.625% US$ 2017 – 50Eurobonds (Series 6) 7.875% US$ 2018 65 70Eurobonds (Series 8) 7.250% US$ 2020 31 33

Total long-term Eurobonds 213 337

In the fourth quarter of 2012, the Company raised funds through the placement of two Eurobonds in the totalamount of US$ 3.0 billion. The Eurobonds were placed in two tranches at par: one in the amount ofUS$ 1.0 billion with a coupon of 3.149% p.a. and maturity in March 2017, and the other in the amount ofUS$ 2.0 billion (RUB 115.2 billion at the CBR official exchange rate as of December 31, 2017) with a couponof 4.199% p.a. and maturity in March 2022. The funds received were used for general corporate purposes.In March 2017, the Company fully repaid Eurobonds (Series 1) of US$ 1.0 billion (RUB 58.4 billion at theCBR official exchange rate at the transaction date).

Eurobonds of the fourth, sixth and eighth series were assumed through the acquisition of TNK-BP.

In March 2017, the Company fully repaid Eurobonds (Series 4) of US$ 0.8 billion (RUB 46.4 billion at theCBR official exchange rate at the transaction date) assumed through the TNK-BP acquisition.

In the fourth quarter of 2017 the Company continued to settle other long-term borrowings under repurchasingagreement operations. As of December 31, 2017, the liabilities of the Company under those transactionsamounted to the equivalent of RUB 240 billion at the CBR official exchange rate as of December 31, 2017.The Company’s own corporate bonds were used as an instrument for those transactions.

The Company is obliged to comply with a number of restrictive financial and other covenants contained inseveral of its loan agreements. Such covenants include maintaining certain financial ratios.

As of December 31, 2017 and December 31, 2016 the Company was in compliance with all restrictive financialand other covenants contained in its loan agreements.

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Short-term loans and borrowings

In 2017 the Company drew down short-term funds from Russian banks under floating and fixed rates.

In 2017 the Company continued to meet its liabilities under repurchasing agreement operations and enteredinto new agreements. As of December 31, 2017 the liabilities of the Company under those transactionsamounted to the equivalent of RUB 1,265 billion (at the CBR official exchange rate as of December 31, 2017).Own corporate bonds were used as an instrument for those transactions.

In 2017 the Company was current on all payments under loan agreements and interest payments.

Finance leases

Repayments of finance lease obligations comprise the following:

As of December 31, 2017

Minimumlease payments

Financeexpense

Present value ofminimum lease

payments

Less than 1 year 9 (4) 5From 1 to 5 years 24 (11) 13Over 5 years 21 (7) 14

Total 54 (22) 32

As of December 31, 2016

Minimumlease payments

Financeexpense

Present value ofminimum lease

payments

Less than 1 year 4 (3) 1From 1 to 5 years 16 (10) 6Over 5 years 24 (9) 15

Total 44 (22) 22

Finance leases entered into by the Company do not contain covenants and are long-term agreements, withcertain leases having purchase options at the end of the lease term. Finance leases are denominated in RUB andUS$.

Property, plant and equipment under capital leases recognized in Property, plant and equipment (Note 24)comprise the following:


Buildings 4 4Plant and machinery 27 12Vehicles 16 16Total cost 47 32

Less: accumulated depreciation (18) (11)

Total net book value of leased property 29 21

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Liabilities related to derivative financial instruments

Short-term liabilities related to derivative financial instruments include liabilities related to cross-currency rateswaps.

In accordance with its foreign currency and interest rate risk management policy the Company enters intocross-currency rate swaps to sell US$. The transactions balance the currency of revenues and liabilities andreduce the overall interest rates on borrowings.

The cross-currency rate swaps are recorded in the consolidated balance sheet at fair value. The measurementof the fair value of the transactions is based on a discounted cash flow model and consensus forecasts of foreigncurrency rates. The consensus forecasts include forecasts of the major international banks and agencies. TheBloomberg system is the main information source for the model.

Derivative financial instruments comprise the following:

Issuedate

Expirydate

Nominal amountas of December 31, 2017 Interest rate

type

Fair value of the liabilitiesas of December 31,

US$ million RUB billion* 2017 2016

Swaps 2012 2017 – – floating – 18Swaps 2013 2018 2,138 123 floating 52 56Swaps 2014 2019 1,010 58 floating 22 24

Total 3,148 181 74 98

* The equivalent nominal amount at the CBR official exchange rate as of December 31, 2017.

Reconciliation of movements in financing activities in the Statement of cash flows with balance-sheet itemsof liabilities:

Long-termloans and

borrowings

Short-termloans and

borrowings

Financelease

liabilities

Otherlong-termfinancialliabilities

Othershort-termfinancialliabilities

Short-termliabilitiesrelated toderivativefinancial

instruments Total

As of January 1, 2017,including 1,889 1,475 22 4 4 98 3,492

Financing activities(cash flow)

Proceeds/repayment of loansand borrowings (298) 644 – 144 192 – 682

Interest paid (145) (70) (4) – – – (219)Repayment of other

financial liabilities – – (7) (1) – (14) (22)

Operating and investingactivities (non-cash flow)

Foreign exchange gain/loss (196) 96 – (1) 1 – (100)Acquisition of interest in

subsidiary, net of cashacquired 61 (8) 3 – – – 56

Offset of other financialliabilities – – – – (105) – (105)

Acquisition – – 14 – – – 14Finance expenses 134 91 4 – – – 229Finance income – – – – – (10) (10)Others – (6) – – 1 – (5)Reclassification 165 (165) – – – – –

As of December 31, 2017 1,610 2,057 32 146 93 74 4,012

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31. Other short-term tax liabilities

Other short-term tax liabilities comprise the following:


Mineral extraction tax 160 115VAT 78 69Excise duties 26 25Property tax 10 9Personal income tax 2 2Other 2 2

Total other tax liabilities 278 222

32. Provisions

Assetretirementobligations

Environmentalremediation

provisionLegal, tax andother claims Total

As of January 1, 2016, including 123 35 13 171

Non-current 119 23 1 143Current 4 12 12 28

Provisions charged during the year (Note 40) 6 4 5 15Increase/(decrease) in the liability resulting from:

Changes in estimates 3 4 (3) 4Changes in the discount rate 13 – – 13Foreign exchange differences (5) – – (5)Unwinding of discount 12 3 – 15Reclassification to assets held for sale 28 3 1 32Utilized (2) (8) (3) (13)

As of December 31, 2016, including 178 41 13 232


Provisions charged during the year (Note 40) 6 5 7 18Increase/(decrease) in the liability resulting from:

Changes in estimates (5) (1) – (6)Changes in the discount rate 28 – – 28Foreign exchange differences (1) – – (1)Unwinding of discount 14 3 – 17Acquisition of subsidiaries (Note 7) – – 2 2Utilized (2) (7) (7) (16)

As of December 31, 2017, including 218 41 15 274


Asset retirement (decommissioning) obligations represent an estimate of the costs of liquidating wells, thereclamation of sand pits, slurry ponds, and disturbed lands, and the dismantling of pipelines and powertransmission lines. The budget for payments under asset retirement obligations is prepared on an annual basis.Depending on the current economic environment the entity’s actual expenditures may vary from the budgetedamounts.

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33. Prepayment on long-term oil and petroleum products supply agreements

During 2013-2014 the Company entered into a number of long-term crude oil and petroleum products supplycontracts which involve the receipt of prepayment. The total minimum delivery volume approximates400 million tonnes. The crude oil and petroleum product prices are calculated based on current market prices.The prepayment is settled through physical deliveries of crude oil and petroleum products.

Deliveries of oil and petroleum products that reduce the prepayment amounts started to be made in 2015. TheCompany considers these contracts to be regular-way contracts which were entered into for the purpose of thedelivery of a non-financial item in accordance with the Company’s expected sale requirements.

2017 2016

As of January 1 1,841 1,905Acquisition of subsidiaries (Note 7) – 58Received – –Reimbursed (255) (122)Total prepayment on long-term oil and petroleum products supply

agreements 1,586 1,841

Less current portion (264) (255)

Long-term prepayment as of December 31 1,322 1,586

The offset amounts under these contracts were RUB 255 billion and RUB 122 billion (US$ 7.59 billion andUS$ 3.85 billion at the CBR official exchange rate at the prepayment dates, the prepayments are not revaluedat each balance sheet date) for 2017 and 2016, respectively.

34. Other non-current liabilities

Other non-current liabilities comprise the following:

As of December 31,

20172016

(restated)

Joint project liabilities 23 23Liabilities for investing activities 4 7Liabilities for joint operation contracts in Germany 14 13Other 4 3

Total other non-current liabilities 45 46

35. Pension benefit obligations

Defined contribution plans

The Company makes payments to the State Pension Fund of the Russian Federation. These payments arecalculated by the employer as a percentage of salary expense and are expensed as accrued.

The Company also maintains a defined contribution corporate pension plan to finance the non-state pensionsof its employees.

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35. Pension benefit obligations (continued)

Defined contribution plans (continued)

Pension contributions recognized in the consolidated statement of profit or loss were as follows:

2017 2016

State Pension Fund 53 43NPF Neftegarant 7 5

Total pension contributions 60 48

36. Shareholders’ equity

Common shares

As of December 31, 2017 and 2016:

Authorized common sharesquantity, millions 10,598amount, billions of RUB 0.6

Issued and fully paid sharesquantity, millions 10,598amount, billions of RUB 0.6

Nominal value of 1 common share, RUB 0.01

On June 15, 2016, the Annual General Shareholders’ Meeting approved dividends on the Company’s commonshares for 2015 in the amount of RUB 125 billion, or RUB 11.75 per share, which comprised 35% of IFRS netincome attributable to the Company’s shareholders. Dividends were paid by the Company in July 2016.

On June 22, 2017 the Annual General Shareholders’ Meeting approved dividends on the Company’s commonshares for 2016 in the amount of RUB 63.4 billion, or RUB 5.98 per share, which comprised 35% of IFRS netincome attributable to the Company’s shareholders. Dividends were paid by the Company in July 2017.

In 2017 the Company revised its dividend policy. The minimum level of dividend payments was increased to50% of IFRS net income attributable to the Company’s shareholders, with the target frequency of paymentsbeing twice a year. In accordance with the above, on September 29, 2017 the Extraordinary Shareholders’Meeting approved interim dividends on the Company’s common shares for the first half of 2017 in the amountof RUB 40.6 billion, or RUB 3.83 per share, which comprised 50% of IFRS net income attributable to theCompany’s shareholders. Dividends were paid by the Company in October 2017.

The dividends are distributed from the net profit of PJSC Rosneft Oil Company calculated in compliance withthe current legislation of the Russian Federation.

In 2017 and 2016 additional paid-in capital of the Company increased by RUB 24 billion and RUB 96 billion,respectively, as a result of the disposal of interests in subsidiaries (Note 17).

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37. Fair value of financial instruments

The fair value of financial assets and liabilities is determined as follows:

· the fair value of financial assets and liabilities quoted on active liquid markets is determined inaccordance with market prices;

· the fair value of other financial assets and liabilities is determined in accordance with generally acceptedmodels and is based on discounted cash flow analysis that relies on prices used for existing transactionsin the current market;

· the fair value of derivative financial instruments is based on market quotes. In illiquid and highly volatilemarkets fair value is determined on the basis of valuation models that rely on assumptions confirmed byobservable market prices or rates as of the reporting date.

Assets and liabilities of the Company that are measured at fair value on a recurring basis in accordance withthe fair value hierarchy are presented in the table below.

Fair value measurementas of December 31, 2017

Level 1 Level 2 Level 3 TotalAssetsCurrent assetsHeld-for-trading 1 – – 1Available-for-sale 50 129 – 179

Non-current assetsAvailable-for-sale – 16 – 16Derivative financial instruments – – – –

Total assets measured at fair value 51 145 – 196

Derivative financial instruments – (74) – (74)

Total liabilities measured at fair value – (74) – (74)

Fair value measurementas of December 31, 2016

Level 1 Level 2 Level 3 TotalAssetsCurrent assetsHeld-for-trading 2 2 – 4Available-for-sale 77 226 – 303

Non-current assetsAvailable-for-sale – 11 – 11Derivative financial instruments – – – –

Total assets measured at fair value 79 239 – 318

Derivative financial instruments – (98) – (98)

Total liabilities measured at fair value – (98) – (98)

The fair value of financial assets available for sale, held-for-trading financial assets at fair value through profitor loss and derivative financial instruments included in Level 2 is measured at the present value of futureestimated cash flows, using inputs such as market interest rates and market quotes of forward exchange rates.

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37. Fair value of financial instruments (continued)

The carrying value of cash and cash equivalents and derivative financial instruments recognized in theseconsolidated financial statements equals their fair value. The carrying value of accounts receivable, accountspayable, loans issued, other financial assets and other financial liabilities recognized in these consolidatedfinancial statements approximates their fair value.

There were no transfers of financial liabilities between Level 1 and Level 2 during the period.

Carrying value Fair value (Level 2)As of December 31, As of December 31,

20172016

(restated) 20172016

(restated)Financial liabilitiesFinancial liabilities at amortized cost:

Loans and borrowings with a variable interestrate (1,549)* (2,004) (1,467)* (1,792)

Loans and borrowings with a fixed interest rate (2,118) (1,360) (2,038) (1,376)Financial lease liabilities (32) (22) (36) (23)

* Including financial instruments designated as hedging instruments with a carrying value of RUB 50 billion and a fair value ofRUB 47 billion.

38. Related party transactions

For the purpose of these consolidated financial statements, parties are considered to be related if one party hasthe ability to control the other party or exercise significant influence over the other party in making financialor operational decisions. In 2017 and 2016 the Company entered into transactions with shareholders andcompanies controlled by shareholders (including enterprises directly or indirectly controlled by the RussianGovernment and the BP Group), associates and joint ventures, key management and pension funds (Note 35).

Related parties may enter into transactions which unrelated parties might not, and transactions between relatedparties may not be effected on the same terms as transactions between unrelated parties.

The disclosure of related party transactions is presented on an aggregate basis for shareholders and companiescontrolled by shareholders, joint ventures and associates, and non-state pension funds. In addition, there may beadditional disclosures of certain significant transactions (balances and turnovers) with certain related parties.

In the course of its ordinary business, the Company enters into transactions with other companies controlledby the Russian Government. In the Russian Federation, electricity and transport tariffs are regulated by theFederal Antimonopoly Service, an authorized governmental agency of the Russian Federation. Bank loans arerecorded based on market interest rates. Taxes are accrued and paid in accordance with applicable tax law.The Company sells crude oil and petroleum products to related parties in the ordinary course of business atprices close to average market prices.

Transactions with shareholders and companies controlled by shareholders

Revenues and income

2017 2016

Oil, gas, petroleum products and petrochemicals sales 784 595Support services and other revenues 6 3Finance income 26 23

816 621

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38. Related party transactions (continued)

Transactions with shareholders and companies controlled by shareholders (continued)

Costs and expenses

2017 2016

Production and operating expenses 14 11Cost of purchased oil, gas, petroleum products and refining costs 73 161Pipeline tariffs and transportation costs 473 443Other expenses 15 13Financial expenses 8 4

583 632

Other operations

2017 2016

Acquisition of subsidiaries – 330Loans received 297 125Loans repaid (58) (2)Loans and borrowings issued – (30)Repayment of loans and borrowings issued 1 –Deposits placed (7) (47)Deposits repaid 2 109

Settlement balances


AssetsCash and cash equivalents 57 549Accounts receivable 68 80Prepayments and other current assets 61 36Other financial assets 636 588

822 1,253

LiabilitiesAccounts payable and accrued liabilities 32 47Loans and borrowings and other financial liabilities 655 352

687 399

Transactions with joint ventures

Crude oil is purchased from joint ventures at Russian domestic market prices.

Revenues and income

2017 2016

Oil, gas, petroleum products and petrochemicals sales 11 24Support services and other revenues 10 5Finance income 26 22

47 51

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Transactions with joint ventures (continued)

Costs and expenses

2017 2016

Production and operating expenses 5 5Cost of purchased oil, gas, petroleum products and refining costs 285 213Pipeline tariffs and transportation costs 9 11Other expenses 4 4Finance expenses 1 –

304 233

Other operations

2017 2016

Acquisition of interest in associates and joint ventures (8) –Loans received – 7Loans repaid – (9)Loans and borrowings issued (2) (25)Repayment of loans and borrowings issued 127 17

Settlement balances


AssetsAccounts receivable 6 9Prepayments and other current assets – 1Other financial assets 52 306

58 316

LiabilitiesAccounts payable and accrued liabilities 85 29Loans and borrowings and other financial liabilities 15 8

100 37

Transactions with associates

Revenues and income

2017 2016

Oil, gas, petroleum products and petrochemicals sales 222 67Support services and other revenues 5 3Finance income – 1

227 71

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Transactions with associates (continued)

Costs and expenses

2017 2016

Production and operating expenses 11 5Cost of purchased oil, gas, petroleum products and refining costs 14 9Pipeline tariffs and transportation costs 1 –Other expenses 13 8

39 22

Other operations

2017 2016

Loans and borrowings issued (32) –

Settlement balances


AssetsAccounts receivable 33 8Prepayments and other current assets 1 –Other financial assets 41 4

75 12

LiabilitiesAccounts payable and accrued liabilities 8 6Loans and borrowings and other financial liabilities 124 –

132 6

Transactions with non-state pension funds

Costs and expenses

2017 2016

Other expenses 7 5

Settlement balances


LiabilitiesAccounts payable and accrued liabilities 1 1

1 1

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Compensation to key management personnel

For the purpose of these consolidated financial statements key management personnel include members of theManagement Board of PJSC Rosneft Oil Company and members of the Board of Directors.

Short-term gross benefits of the Management Board members, taking into account personnel rotation,including payroll and bonuses, totaled RUB 2,711 million and RUB 2,884 million in 2017 and 2016,respectively (social security fund contributions, which are not Management Board members’ income, totaledRUB 373 million and RUB 395 million, respectively). Short-term gross benefits exclude one-offreimbursements for major acquisition projects and integration of new assets, compensations for medicalinsurance and transportation costs paid in 2017. Short-term gross benefits for 2017 are disclosed in accordancewith the Russian securities law on information disclosure. There were no share-based benefits paid.

On June 22, 2017, the Annual General Shareholders Meeting approved remuneration to the followingmembers of the Company’s Board of Directors for the period of their service in the following amounts:Mr. Andrey Akimov – US$ 545,000 (RUB 32.7 million at the CBR official exchange rate on June 22, 2017);Mr. Matthias Warnig – US$ 580,000 (RUB 34.8 million at the CBR official exchange rate on June 22, 2017);Mr. Oleg Viyugin – US$ 580,000 (RUB 34.8 million at the CBR official exchange rate on June 22, 2017);Mr. Donald Humphreys – US$ 565,000 (RUB 33.9 million at the CBR official exchange rate on June 22,2017). Remuneration does not include compensation of travel expenses. No remuneration was paid to membersof the Board of Directors who are state officials (Andrey Belousov and Alexander Novak) or toMr. Igor Sechin, the Chairman of the Management Board, for their Board of Directors service.

On June 15, 2016, the Annual General Shareholders Meeting approved remuneration to the followingmembers of the Company’s Board of Directors for the period of their service in the following amounts:Mr. Andrey Akimov – US$ 560,000 (RUB 37.0 million at the CBR official exchange rate on June 15, 2016);Mr. Matthias Warnig – US$ 580,000 (RUB 38.3 million at the CBR official exchange rate on June 15, 2016);Mr. Oleg Viyugin – US$ 580,000 (RUB 38.3 million at the CBR official exchange rate on June 15, 2016);Mr. Donald Humphreys – US$ 550,000 (RUB 36.3 million at the CBR official exchange rate on June 15,2016). Remuneration does not include compensation of travel expenses. No remuneration was paid to membersof the Board of Directors who are state officials (Andrey Belousov and Alexander Novak) or toMr. Igor Sechin, the Chairman of the Management Board, for their Board of Directors service.

http://www.rosneft.com/Investors/governance/board/Andrey_Belousov/

http://www.rosneft.com/Investors/governance/board/Alexander_Novak/

http://www.rosneft.com/Investors/governance/board/Andrey_Belousov/

http://www.rosneft.com/Investors/governance/board/Alexander_Novak/

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39. Key subsidiaries

NameCountry of

incorporation Core activity

2017 2016Preferred

andcommonshares

Votingshares

Preferredand

commonshares

Votingshares

% % % %

Exploration and productionPJSC Orenburgneft Russia Oil and gas development

and production 100.00 100.00 100.00 100.00JSC Samotlorneftegaz Russia Oil and gas development

and production 100.00 100.00 100.00 100.00JSC Tumenneftegaz Russia Oil and gas development

and production 100.00 100.00 100.00 100.00JSC Verkhnechonskneftegaz Russia Oil and gas development

and production 79.95 79.95 99.94 99.94JSC Vankorneft Russia Oil and gas development

and production 50.10 50.10 50.10 50.10LLC RN-Yuganskneftegaz Russia Oil and gas production

operator services 100.00 100.00 100.00 100.00PJSC Bashneft Oil Company Russia Oil and gas development

and production 60.33 70.93 52.39 61.59

Refining, marketing and distributionJSC RORC Russia Petroleum refining 100.00 100.00 100.00 100.00JSC Angarsk Petrochemical Company Russia Petroleum refining 100.00 100.00 100.00 100.00JSC Novokuybyshev Refinery Russia Petroleum refining 100.00 100.00 100.00 100.00LLC RN-Komsomolsky Refinery Russia Petroleum refining 100.00 100.00 100.00 100.00JSC Syzran Refinery Russia Petroleum refining 100.00 100.00 100.00 100.00JSC Achinsk Refinery Russia Petroleum refining 100.00 100.00 100.00 100.00JSC Kuybyshev Refinery Russia Petroleum refining 100.00 100.00 100.00 100.00PJSC Saratov Oil Refinery Russia Petroleum refining 85.48 91.13 85.48 91.13JSC PCEC Russia Marketing and distribution 100.00 100.00 100.00 100.00LLC RN-Commerce Russia Marketing and distribution 100.00 100.00 100.00 100.00Rosneft Trading S.A. Switzerland Marketing and distribution 100.00 100.00 100.00 100.00Rosneft Trade Limited Cyprus

Republic Marketing and distribution 100.00 100.00 100.00 100.00Rosneft Deutschland GmbH Germany Marketing and distribution 100.00 100.00 100.00 100.00

OtherJSC RN Holding Russia Holding company 100.00 100.00 100.00 100.00LLC Neft-Aktiv Russia Investing activity 100.00 100.00 100.00 100.00Rosneft Finance S.A. Luxemburg Finance services 100.00 100.00 100.00 100.00JSC Russian Regional Development

Bank (VBRR) Russia Banking 98.34 98.34 98.34 98.34

40. Contingencies

Russian business environment

Russia continues economic reforms and the development of its legal, tax and regulatory frameworks as requiredby a market economy. The future stability of the Russian economy is largely dependent upon these reforms anddevelopments and the effectiveness of economic, financial and monetary measures undertaken by the government.

The Russian economy has been negatively impacted by a decline in oil prices and sanctions imposed on Russiaby a number of countries. Ruble interest rates remain high. The combination of the above has resulted inreduced access to capital, a higher cost of capital and uncertainty regarding economic growth, which couldnegatively affect the Company’s future financial position, results of operations and business prospects.Management is taking appropriate measures to support the sustainability of the Company’s business in thecurrent circumstances.

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40. Contingencies (continued)

Russian business environment (continued)

The Company also has investments in associates and joint ventures and advances issued to contractorsoperating in international jurisdictions. Besides commercial risks being a part of any investment operation,assets in a number of regions of the Company’s activities also bear political, economic and tax risks which areanalyzed by the Company on a regular basis.

Guarantees and indemnities issued

An unconditional unlimited guarantee in favor of the Government and municipal authorities of Norway iseffective in respect of the Company’s operations on the Norwegian continental shelf. That guarantee fullycovers all potential ongoing environmental liabilities of RN Nordic Oil AS. A parent company guarantee isrequired by Norwegian legislation and is an essential condition for licensing the operations of RN Nordic Oil ASon the Norwegian continental shelf jointly with Statoil ASA.

The Company’s agreements with Eni S.p.A, Statoil АSА and the ExxonMobil Oil Corporation under theRussian Federation shelf exploration program contain mutual guarantees provided in 2013 and 2014 that areunconditional, unlimited and open-ended, and also provide that the partners will pay a commercial discoverybonus to the Company.

The partnership agreement with the ExxonMobil Oil Corporation for difficult to extract oil reserves in WesternSiberia contains mutual guarantees that are unconditional, unlimited and open-ended, and provides forproduction bonus payments to the Company starting from the launch of commercial production.

In the fourth quarter of 2015 in accordance with the cooperation agreement on difficult to extract oil reserveswith Statoil АSА, both parties issued parent guarantees on the discharging of the mutual liabilities of theirrelated parties. These guarantees are unconditional, unlimited and open-ended.

In order to facilitate flexible terms and conditions for supplies and payments within hydrocarbon trading contracts,in 2016 the Company issued sureties to banks covering the period up to the year 2022 and totaling euro 6 billion.As of the period-end the probability of events triggering settlement of sureties was assessed as remote.

In the course of its investing activities, the Company issued sureties to third parties up to the equivalent amountof RUB 8 billion at the CBR official exchange rate as of December 31, 2017. As of the period-end theCompany assesses the probability of settlement as remote.

Legal claims

Rosneft and Bashneft are involved in a number of legal disputes with PJSFC Sistema and JSC Sistema-Invest,related to the illegal ownership of Bashneft shares by PJSFC Sistema and Sistema-Invest, In particular, theyare the co-plaintiffs against PJSFC Sistema and JSC Sistema-Invest in the case of a recovery of losses in favorof Bashneft in the amount of RUB 170.6 billion caused by the reorganization of Bashneft (case 1) as well asin the case of a recovery of losses in the amount of RUB 131.6 billion in connection with the payment ofdividends to defendants during the period of their illegal possession of the Bashneft shares (case 2). They arealso the co-defendants in the case of the PJSFC Sistema’s claim for recovery of losses in the amount of RUB330.4 billion arising following the actions of Rosneft and Bashneft to protect the legitimate interests ofBashneft (case 3).

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Legal claims (continued)

The abovementioned disputes were settled by the parties by concluding a settlement agreement approved bythe Decision of the Arbitration Court of the Republic of Bashkortostan dated December 26, 2017 on case 1.According to the settlement agreement, PJSFC Sistema and JSC Sistema-Invest guarantee to compensate theCompany previously caused losses amounting to RUB 100 billion by March 30, 2018, after which the partieswill file a waiver of mutual claims on cases 2 and 3.

On December 31, 2015, First National Petroleum Corporation (“FNPC”) initiated arbitration proceedingsunder the Rules of the Arbitration Institute of the Stockholm Chamber of Commerce againstJSC Tyumenneftegaz (“TNG”), a subsidiary of the Company, seeking compensation of losses, interest andarbitration costs of over US$ 260 million (over RUB 15 billion at the CBR official exchange rate onDecember 31, 2017) for alleged breach of the agreement between FNPC and TNG to incorporate a jointventure, Tumtex, on the territory of the Russian Federation. The decision is expected by the end of April 2018.

In October-November 2014 former shareholders of JSC RN Holding filed a lawsuit against the Companyclaiming recovery of damages caused by the improper (in the plaintiffs’ view) assessment of the shares’ valuein the course of their repurchase in accordance with the Federal Law On Open Joint Stock Companies. Theclaims were dismissed by the court of first instance, whose ruling was subsequently upheld in a ruling of theappeal court. In January 2017 the cassation court left the rulings of the lower courts unchanged. In May 2017the Supreme Court of the Russian Federation dismissed the cassation. The decision of the Supreme Court ofthe Russian Federation was appealed by the plaintiffs. The appeal was dismissed.

The amount and timing of any outflow related to the above claims cannot be estimated reliably. Rosneft andits subsidiaries are involved in other litigation which arises from time to time in the course of their businessactivities. Management believes that the ultimate result of that litigation will not materially affect theperformance or financial position of the Company.

Taxation

Legislation and regulations regarding taxation in Russia continue to evolve. Various legislative acts andregulations are not always clearly written, and their interpretation is subject to the opinions of the taxpayers,and local, regional, and national tax authorities, and the Ministry of Finance of the Russian Federation.Instances of inconsistent opinions are not unusual.

In Russia, tax returns remain open and subject to inspection for a period of up to three years. The fact that ayear has been reviewed does not close that year, or any tax return applicable to that year, from further reviewduring the period of three calendar years preceding the year when the inspection started.

In accordance with Russian tax legislation, if an understatement of a tax liability is detected as a result of aninspection, penalties and fines to be paid might be material in respect of the tax liability misstatement.

Effective January 1, 2012, the rules for defining market prices for fiscal control purposes were changed andthe list of entities that could be recognized as interdependent entities and the list of controlled transactionswere expanded. Due to the absence of law enforcement precedents based on the rules, as well as certaincontradictions in the provisions of the law, these rules cannot be considered clear or precise. To eliminatesignificant risks posed to the consolidated financial statements by related party transactions, the Company hasdeveloped methods for pricing major types of controlled transactions between related parties. The Companyalso researches databases to determine the market price levels (ROIs) for controlled transactions annually.

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Taxation (continued)

As part of the new regime for fiscal control over the pricing of related party transactions, the Company andthe Federal Tax Service signed a number of pricing agreements in 2012-2017 with respect to the taxation ofoil sales transactions in Russia.

To date, the Russian Federal Tax Service has not exercised its right to conduct tax audits under the rules oftransfer pricing for 2012-2013 and these periods are closed to tax control measures. For subsequent periodsthe Company has provided explanations to the Russian Federal Tax Service and the regional tax authorities tothe extent necessary for the completed transactions.

The Company believes that risks concerning related party transactions during 2017 and earlier will not have amaterial effect on its financial position or results of operations.

In accordance with the consolidated income tax taxpayer institute enacted in 2012 the Company has created aconsolidated group of taxpayers which includes Rosneft and its 21 subsidiaries. Rosneft became theresponsible taxpayer of the group from January 1, 2012. Since January 1, 2017, under the terms of theagreement the number of members of the consolidated group of taxpayers has been 64.

In 2014, amendments to tax legislation were adopted aimed at fiscal stimulation of the Russian economy viadeoffshorization, and they took effect on January 1, 2015. In particular, these amendments embedded inRussian tax legislation the concepts of actual right to income, fiscal residence of legal entities, and income taxrules for controlled foreign companies. The Company’s management has accounted for these amendments inits current and deferred income tax estimates.

During the reporting period, the tax authorities continued their inspections of Rosneft and some of itssubsidiaries for 2013-2016. Rosneft and these subsidiaries are disputing a number of claims by the FederalTax Service pre-court and in court.

The Company’s management does not expect the outcome of the inspections to have a material impact on theCompany’s consolidated balance sheet or results of operations.

Overall, management believes that the Company has paid or accrued all taxes that are applicable. For taxesother than income tax, where uncertainty exists, the Company has accrued tax liabilities based onmanagement’s best estimate of the probable outflow of resources that will be required to settle these liabilities.Potential liabilities that management has identified at the reporting date as those that may be subject to differentinterpretations of tax laws and regulations are not accrued in the consolidated financial statements.

Capital commitments

The Company and its subsidiaries are engaged in ongoing capital projects for the exploration and developmentof production facilities and the modernization of refineries and the distribution network. The budgets for theseprojects are generally set on an annual basis.

The total amount of contracted but not yet performed deliveries related to the construction and acquisition ofproperty, plant and equipment amounted to RUB 716 billion and RUB 641 billion as of December 31, 2017and 2016, respectively.

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Environmental liabilities

The Company periodically evaluates its environmental liabilities pursuant to environmental regulations. Suchliabilities are recognized in the consolidated financial statements as and when identified. Potential liabilities,that could arise as a result of changes in existing regulations or the settlement of civil litigation, or as a resultof changes in environmental standards, cannot be reliably estimated but may be material. With the existingsystem of control, management believes that there are no material liabilities for environmental damage otherthan those recorded in these consolidated financial statements.

41. Supplementary oil and gas disclosure (unaudited)

IFRS do not require information on oil and gas reserves to be disclosed. While this information has beendeveloped with reasonable care and is disclosed in good faith, it is emphasized that the data representsmanagement’s best estimates. Accordingly, this information may not necessarily represent the current financialcondition of the Company and its future financial results.

The Company’s activities are conducted primarily in Russia, which is considered as a single geographic area.

Capitalized costs relating to oil and gas production are presented below

Consolidated subsidiaries and joint operations

As of December 31:

20172016

(restated)

Oil and gas properties related to proved reserves 8,333 7,270Oil and gas properties related to unproved reserves 386 243Total capitalized costs 8,719 7,513

Accumulated depreciation, depletion and impairment losses (2,628) (2,174)

Net capitalized costs 6,091 5,339

Costs incurred in oil and gas property acquisition, exploration and development activities are presentedbelow



20172016

(restated)

Acquisition of properties – proved oil and gas reserves 193 535Acquisition of properties – unproved oil and gas reserves 123 17Exploration costs 45 30Development costs 876 621

Total costs incurred 1,237 1,203

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41. Supplementary oil and gas disclosure (unaudited) (continued)

The results of operations relating to oil and gas production are presented below



20172016

(restated)

Revenue 3,138 2,525Production costs (excluding production taxes) (379) (317)Selling, general and administrative expenses (104) (100)Exploration expense (15) (14)Depreciation, depletion and amortization, impairment and liquidation losses (478) (395)Taxes other than income tax (1,574) (1,073)Income tax (120) (130)

Results of operations relating to oil and gas production 468 496

Reserve quantity information

Since 2014 the Company has disclosed its reserves calculated in accordance with the Petroleum ResourcesManagement System (PRMS). For the purpose of the evaluation of reserves as of December 31, 2017 and2016, the Company used oil and gas reserve information prepared by DeGolyer and MacNaughton,independent reservoir engineers. Proved reserves are those estimated quantities of petroleum which, throughthe analysis of geoscience and engineering data, can be estimated with reasonable certainty to be commerciallyrecoverable from a given date forward from known reservoirs and under defined economic conditions andoperating methods. In certain cases, the recovery of such reserves may require considerable investments inwells and related equipment. Proved reserves also include additional oil and gas reserves that will be extractedafter the expiry date of license agreements or may be discovered as a result of secondary and tertiary extractionwhich have been successfully tested and checked for commercial benefit. Proved developed reserves are thosequantities of crude oil and gas expected to be recovered from existing wells using existing equipment andoperating methods.

Proved undeveloped oil and gas reserves are reserves that are expected to be recovered from new wells onundrilled acreage, or from existing wells where a relatively major expenditure is required for recompletion.Reserves on undrilled acreage are limited to those drilling units offsetting productive units that are reasonablycertain of production when drilled. Due to inherent industry uncertainties and the limited nature of depositdata, estimates of reserves are subject to change as additional information becomes available.

The Company management included in proved reserves those reserves which the Company intends to extractafter the expiry of the current licenses. The licenses for the development and production of hydrocarbonscurrently held by the Company generally expire between 2019 and 2202, and the licenses for the mostimportant deposits expire between 2038 and 2150. In accordance with the effective version of the law of theRussian Federation On Subsurface Resources (the “Law”), licenses are currently granted for a productionperiod determined on the basis of technological and economic criteria applied to the development of themineral deposit which guarantee the rational use of subsurface resources and necessary environmentalprotection. In accordance with the Law and upon the gradual expiration of old licenses issued under theprevious version of the Law, the Company extends its hydrocarbon production licenses for the wholeproductive life of the fields. Extension of the licenses depends on compliance with the terms set forth in theexisting license agreements. As of the date of these consolidated financial statements, the Company is generallyin compliance with all the terms of the license agreements and intends to continue complying with such termsin the future.

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Reserve quantity information (continued)

The Company’s estimates of net proved liquid hydrocarbons and sales gas reserves and changes thereto for theyears ended December 31, 2017 and 2016 are shown in the table below and expressed in million barrels of oilequivalent (liquid hydrocarbons production data was recalculated from tonnes to barrels using field specificcoefficients; sales gas production data was recalculated from cubic meters to barrels of oil equivalent (“boe”)using an average ratio).


2017 2016million boe million boe

Beginning of year 43,217 40,359Revisions of previous estimates 909 1,169Extensions and discoveries 1,046 1,038Improved recovery 1 29Purchase of new reserves 470 2,388Sale of reserves – (10)Production (1,862) (1,756)

End of year 43,781 43,217

Proved developed reserves 20,436 20,015

Minority interest in total proved reserves 2,049 1,881Minority interest in proved developed reserves 1,306 1,327

Standardized measure of discounted future net cash flows and changes therein relating to proved oiland gas reserves

The standardized measure of discounted future net cash flows related to the above oil and gas reserves is basedon PRMS. Estimated future cash inflows from oil, condensate and gas production are computed by applyingthe projected prices the company uses in its long-term forecasts to year-end quantities of estimated net provedreserves. Future development and production costs are those estimated future expenditures necessary todevelop and produce estimated proved reserves as of year-end based on current expenses and costs andforecasts. In certain cases, future values, either higher or lower than current values, were used as a result ofanticipated changes in operating conditions.

Estimated future income taxes are calculated by applying appropriate year-end statutory tax rates. These ratesreflect allowable deductions and tax credits and are applied to estimate future net pre-tax cash flows, net of thetax bases of related assets.

Discounted future net cash flows are calculated using a 10% p.a. discount factor. Discounting requires year-by-year estimates of future expenditures to be incurred in the periods when the reserves are extracted.

The information provided in the table below does not represent management’s estimates of the Company’sexpected future cash flows or of the value of its proved oil and gas reserves. Estimates of proved reserveschange over time as new information becomes available. Moreover, probable and possible reserves which maybecome proved in the future are excluded from the calculations. The arbitrary valuation requires assumptionsas to the timing and the amount of future development and production costs. The calculations should not berelied upon as an indication of the Company’s future cash flows or of the value of its oil and gas reserves.

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Standardized measure of discounted future net cash flows


2017 2016

Future cash inflows 79,122 85,996Future development costs (6,105) (5,410)Future production costs (42,748) (45,667)Future income tax expenses (5,206) (5,857)Future net cash flows 25,063 29,062

Discount for estimated timing of cash flows (15,996) (18,718)

Discounted value of future cash flows as of the end of year 9,067 10,344

Share of other (minority) shareholders in discounted value of future cash flows


UOM 2017 2016

Share of other (minority) shareholders in discountedvalue of future cash flows RUB billion 717 727

Changes therein relating to proved oil and gas reserves


2017 2016

Discounted value of future cash flows as of the beginning of year 10,344 9,750Sales and transfers of oil and gas produced, net of production costs and

taxes other than income taxes (1,081) (1,035)Changes in price estimates, net (1,689) (607)Changes in estimated future development costs (1,185) (1,042)Development costs incurred during the period 876 621Revisions of previous reserves estimates 188 271Increase in reserves due to discoveries, less respective expenses 216 248Net change in income taxes 252 289Accretion of discount 1,034 975Net changes due to purchases of oil and gas fields 112 876Net changes due to sales of oil and gas fields – (2)

Discounted value of future cash flows as of the end of year 9,067 10,344

Company’s share in costs, inventories and future cash flows of the joint ventures and associates

UOM 20172016

(restated)

Share in capitalized costs relating to oil and gasproducing activities (total) RUB billion 250 218

Share in results of operations for oil and gas producingactivities (total) RUB billion 42 17

Share in estimated proved oil and gas reserves million boe 2,078 2,192Share in estimated proved developed oil and gas reserves million boe 1,119 1,206Share in discounted value of future cash flows RUB billion 483 619

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Contact information

PJSC Rosneft Oil Company

Legal address:Russian Federation, 115035, Moscow, Sofiyskaya embankment, 26/1

Mailing address:Russian Federation, 117997, Moscow, Sofiyskaya embankment, 26/1

Phone:+7 (499) 517-88-99

Fax:+7 (499) 517-72-35

E-mail:[email protected]

Corporate website:www.rosneft.ru (Russian)

www.rosneft.com (English)

mailto:[email protected]

http://www.rosneft.ru/

http://www.rosneft.com/

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